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Downside Risk Management in Emerging Markets

Journal of Investment Consulting, Vol. 12, No. 1, 2011

14 Pages Posted: 26 Jul 2011 Last revised: 7 May 2013

Issam S. Strub

The Cambridge Strategy

Edward D. Baker III

The Cambridge Strategy

Multiple version iconThere are 2 versions of this paper

Date Written: April 26, 2012

Abstract

This article presents various techniques for downside risk control of an emerging markets equity index or long only fund. We evaluate different risk adjusted strategies applied to dynamic asset allocation between an emerging markets equity index and cash and at a later stage between an emerging markets equity index and a US bonds index. We demonstrate that it is possible to significantly reduce both volatility and maximum drawdown of an equity index without a notable decrease in returns by adjusting the allocation to the equity index according to risk levels measured either by volatility or tail risk using Extreme Value Theory. These techniques can be applied to the construction of risk control indices and funds which target a fixed level of volatility or tail risk through time.

Keywords: Emerging Markets, Tail Risk, Extreme Value Theory (EVT), Dynamic Asset allocation, Value at Risk (VaR), Expected Shortfall (ES), Conditional Value at Risk (CVaR), Maximum Drawdown, Volatility, Risk Management, Risk Control Index

JEL Classification: C10, G11, G15

Suggested Citation

Strub, Issam S. and Baker, Edward D., Downside Risk Management in Emerging Markets (April 26, 2012). Journal of Investment Consulting, Vol. 12, No. 1, 2011. Available at SSRN: https://ssrn.com/abstract=1889252

Issam S. Strub (Contact Author)

The Cambridge Strategy ( email )

36-38 Berkeley Square
7th Floor
London, W1J 5AE
United Kingdom

Edward D. Baker III

The Cambridge Strategy ( email )

7th Floor, Berger House
London, W1J 5AE
United Kingdom

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