Robust Inference of Risks of Large Portfolios

45 Pages Posted: 12 Jan 2015

See all articles by Jianqing Fan

Jianqing Fan

Princeton University - Bendheim Center for Finance

Fang Han

Johns Hopkins University

Han Liu

Princeton University - Department of Operations Research & Financial Engineering (ORFE)

Byron Vickers

Princeton University - Department of Operations Research & Financial Engineering (ORFE)

Date Written: January 10, 2015

Abstract

We propose a bootstrap-based robust high-confidence level upper bound (Robust H-CLUB) for assessing the risks of large portfolios. The proposed approach exploits rank-based and quantile-based estimators, and can be viewed as a robust extension of the H-CLUB method (Fan et al., 2015). Such an extension allows us to handle possibly misspecified models and heavy-tailed data. Under mixing conditions, we analyze the proposed approach and demonstrate its advantage over the H-CLUB. We further provide thorough numerical results to back up the developed theory. We also apply the proposed method to analyze a stock market dataset.

Keywords: High dimensionality; robust inference; rank statistics; quantile statistics; risk management; covariance matrix.

JEL Classification: G11, C14, G32, C58

Suggested Citation

Fan, Jianqing and Han, Fang and Liu, Han and Vickers, Byron, Robust Inference of Risks of Large Portfolios (January 10, 2015). Available at SSRN: https://ssrn.com/abstract=2547986 or http://dx.doi.org/10.2139/ssrn.2547986

Jianqing Fan

Princeton University - Bendheim Center for Finance ( email )

26 Prospect Avenue
Princeton, NJ 08540
United States
609-258-7924 (Phone)
609-258-8551 (Fax)

HOME PAGE: http://orfe.princeton.edu/~jqfan/

Fang Han (Contact Author)

Johns Hopkins University ( email )

Baltimore, MD 20036-1984
United States

Han Liu

Princeton University - Department of Operations Research & Financial Engineering (ORFE) ( email )

Sherrerd Hall, Charlton Street
Princeton, NJ 08544
United States

Byron Vickers

Princeton University - Department of Operations Research & Financial Engineering (ORFE) ( email )

Sherrerd Hall, Charlton Street
Princeton, NJ 08544
United States

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