Tail Risk Reduction Strategies

RETHINKING VALUATION AND PRICING MODELS: LESSONS LEARNED FROM THE CRISIS AND FUTURE CHALLENGES, C.S. Wehn, G.N. Gregoriou, C. Hoppe, eds., Elsevier

Posted: 28 Mar 2012

See all articles by Lerby Ergun

Lerby Ergun

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE); Duisenberg School of Finance; Tinbergen Institute

Philip A. Stork

Vrije Universiteit Amsterdam, School of Business and Economics; Tinbergen Institute

Date Written: January 30, 2012

Abstract

We analyze a number of systematic investment strategies that intend to reduce tail risk. Using Extreme Value Theory, we calculate Value at Risk and Expected Shortfall measures. A CAPM and down- and upside beta framework is used to study investment returns over different asset classes. We find that some mechanical strategies generate average compounded returns similar to those of the buy-and-hold strategy, and that tail risks are indeed reduced significantly.

Keywords: tail risk, investment strategy, technical analysis

JEL Classification: C53, G11, G12, G14

Suggested Citation

Ergun, Lerby and Stork, Philip A., Tail Risk Reduction Strategies (January 30, 2012). RETHINKING VALUATION AND PRICING MODELS: LESSONS LEARNED FROM THE CRISIS AND FUTURE CHALLENGES, C.S. Wehn, G.N. Gregoriou, C. Hoppe, eds., Elsevier. Available at SSRN: https://ssrn.com/abstract=2029490

Lerby Ergun

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE) ( email )

P.O. Box 1738
3000 DR Rotterdam, NL 3062 PA
Netherlands

Duisenberg School of Finance ( email )

Gustav Mahlerplein 117
Amsterdam, 1082 MS
Netherlands

Tinbergen Institute ( email )

Burg. Oudlaan 50
Rotterdam, 3062 PA
Netherlands

Philip A. Stork (Contact Author)

Vrije Universiteit Amsterdam, School of Business and Economics ( email )

De Boelelaan 1105
Amsterdam, 1081HV
Netherlands

Tinbergen Institute ( email )

Gustav Mahlerplein 117
Amsterdam, 1082 MS
Netherlands

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