The Benefits of Dynamic Risk Management: Mitigating Downside Risk Without Compromising Long-Term Growth Prospects
Université Paris-Dauphine - DRM-CEREG
EDHEC Graduate School of Management - Risk and Asset Management Research Center
October 20, 2011
Is it really possible to control for the downside risk when the market environment is in constant evolution? If so, what would be the long-term growth prospects of such a strategy? We show in this article that when the dynamics of the variance and correlation terms are properly taken into account, downside risk can be mitigated without compromising long-term growth prospects. But robustness checks suggest that these benefits only hold true for fast moving investors dealing with liquid instruments, as large and unforeseen events may necessitate swift and potentially major adjustments of the portfolio structure.
Number of Pages in PDF File: 44
Keywords: Modern Portfolio Theory, Diversification, Dynamic Portfolio Construction, GARCH, Regime Switching Correlation, Active Management, Hedge Fundsworking papers series
Date posted: October 22, 2011 ; Last revised: October 25, 2011
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