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Optimal Portfolio Choice in the Presence of Domestic Systemic Risk: Empirical Evidence from Stock MarketsMarcel ProkopczukZeppelin University - Institute of Corporate Management & Economics; University of Reading - Henley Business School - ICMA Centre January 1, 2011 Decisions in Economics and Finance, Vol. 34, No. 2, pp. 141-168, 2011 Abstract: In this paper we empirically investigate the consequences of domestic systemic risk for stock market investors. To tackle this issue, we consider two different investment strategies. One strategy is to be 'crisis-conscious,' i.e. taking the possibility of systemic events into account, the other one is to be 'crisis-ignorant' and thus disregarding systemic risk. We compare the optimal portfolio choices and investment results of these strategies in an historical simulation, using almost three decades of historical stock price data. Our main findings are as follows: the crisis-conscious investor tends to choose less extreme portfolio weights for individual stocks than the ignorant investor. The overall risky investment is, however, of similar size for both. By ignoring the possibility of systemic events, the crisis-ignorant strategy performs significantly worse from the viewpoint of expected return as well as expected utility.
Number of Pages in PDF File: 41 Keywords: Systemic Risk, Optimal Portfolio Choice JEL Classification: G11, C51 Accepted Paper SeriesDate posted: February 10, 2011 ; Last revised: January 30, 2012Suggested CitationContact Information
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