Estimating Portfolio Risk for Tail Risk Protection Strategies

48 Pages Posted: 5 Jun 2017 Last revised: 17 Aug 2019

See all articles by David Happersberger

David Happersberger

Lancaster University - Department of Accounting and Finance; Invesco

Harald Lohre

Invesco; Centre for Financial Econometrics, Asset Markets and Macroeconomic Policy, Lancaster University Management School

Ingmar Nolte

Lancaster University - Department of Accounting and Finance

Date Written: August 16, 2019

Abstract

We forecast portfolio risk for managing dynamic tail risk protection strategies, based on extreme value theory, expectile regression, Copula-GARCH and dynamic GAS models. Utilizing a loss function that overcomes the lack of elicitability for Expected Shortfall, we propose a novel Expected Shortfall (and Value-at-Risk) forecast combination approach, which dominates simple and sophisticated standalone models as well as a simple average combination approach in modelling the tail of the portfolio return distribution. While the associated dynamic risk targeting or portfolio insurance strategies provide effective downside protection, the latter strategies suffer less from inferior risk forecasts given the defensive portfolio insurance mechanics.

Keywords: Tail Risk Protection, CPPI, DPPI, Risk Modelling, Value at Risk, Expected Shortfall, Return Synchronization

JEL Classification: C13, C14, C22, C53, G11

Suggested Citation

Happersberger, David and Lohre, Harald and Nolte, Ingmar, Estimating Portfolio Risk for Tail Risk Protection Strategies (August 16, 2019). Available at SSRN: https://ssrn.com/abstract=2980750 or http://dx.doi.org/10.2139/ssrn.2980750

David Happersberger (Contact Author)

Lancaster University - Department of Accounting and Finance ( email )

Lancaster, Lancashire LA1 4YX
United Kingdom

Invesco

An der Welle 5
Frankfurt am Main, 60322
Germany

Harald Lohre

Invesco ( email )

An der Welle 5
Frankfurt am Main, 60322
Germany

HOME PAGE: http://www.de.invesco.com/portal/site/de-de/home/ueber-uns/invesco-quantitative-strategies/

Centre for Financial Econometrics, Asset Markets and Macroeconomic Policy, Lancaster University Management School

Bailrigg
Lancaster LA1 4YX
United Kingdom

HOME PAGE: http://www.lancaster.ac.uk/lums/research/research-centres/financial-econometrics/

Ingmar Nolte

Lancaster University - Department of Accounting and Finance ( email )

Lancaster, Lancashire LA1 4YX
United Kingdom

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