The Diversification Delta: A Different Perspective

Posted: 22 May 2019

See all articles by Yuri Salazar

Yuri Salazar

University of Essex - Centre for Computational Finance and Economic Agents

Robert J. Bianchi

Griffith University

Michael E. Drew

Griffith University

Stefan Trück

Macquarie University Sydney - Department of Applied Finance and Actuarial Studies; Financial Research Network (FIRN); Centre for International Finance and Regulation (CIFR); Macquarie University, Macquarie Business School

Date Written: November 3, 2014

Abstract

Vermorken et al. (2012) introduce a new measure of diversification, the Diversification Delta based on the empirical entropy. The entropy as a measure of uncertainty has successfully been used in several frameworks and takes into account the uncertainty related to the entire statistical distribution and not just the first two moments of a distribution. However, the suggested Diversification Delta measure has a number of drawbacks that we highlight in this article. We also propose an alternative measure based on the exponential entropy which overcomes the identified shortcomings. We present the properties of this new measure and illustrate its usefulness in an empirical example of a portfolio of U.S. stocks and bonds.

Keywords: Portfolio Optimization, Diversification Measures, Risk Management

JEL Classification: G11, G23, C58

Suggested Citation

Salazar, Yuri and Bianchi, Robert J. and Drew, Michael E. and Trueck, Stefan, The Diversification Delta: A Different Perspective (November 3, 2014). CIFR Paper No. 047/2014. Available at SSRN: https://ssrn.com/abstract=2518705 or http://dx.doi.org/10.2139/ssrn.2518705

Yuri Salazar

University of Essex - Centre for Computational Finance and Economic Agents ( email )

Wivenhoe Park
Colchester, Essex CO4 3SQ
United Kingdom

Robert J. Bianchi

Griffith University ( email )

170 Kessels Road
Nathan, Queensland QLD 4111
Australia

Michael E. Drew

Griffith University ( email )

Brisbane, Queensland 4111
Australia

Stefan Trueck (Contact Author)

Macquarie University Sydney - Department of Applied Finance and Actuarial Studies ( email )

North Ryde
Sydney, New South Wales 2109
Australia
61298508483 (Phone)
61298508483 (Fax)

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

Centre for International Finance and Regulation (CIFR) ( email )

Level 7, UNSW CBD Campus
1 O'Connell Street
Sydney, NSW 2000
Australia

Macquarie University, Macquarie Business School ( email )

New South Wales 2109
Australia

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