Estimating Portfolio Risk for Tail Risk Protection Strategies

European Financial Management, Vol. 26, Issue 4, pp. 1107–1146, 2020

47 Pages Posted: 5 Jun 2017 Last revised: 3 Sep 2020

See all articles by David Happersberger

David Happersberger

Lancaster University - Department of Accounting and Finance; Invesco

Harald Lohre

Robeco Quantitative Investments; Lancaster University Management School

Ingmar Nolte

Lancaster University - Department of Accounting and Finance

Date Written: December 17, 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, Forecast Combination, 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 (December 17, 2019). European Financial Management, Vol. 26, Issue 4, pp. 1107–1146, 2020, 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

Robeco Quantitative Investments ( email )

Weena 850
Rotterdam, 3011 AG
Netherlands

Lancaster University Management School

Bailrigg
Lancaster LA1 4YX
United Kingdom

HOME PAGE: http://www.lancaster.ac.uk/lums/people/harald-lohre

Ingmar Nolte

Lancaster University - Department of Accounting and Finance ( email )

Lancaster, Lancashire LA1 4YX
United Kingdom

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
337
Abstract Views
1,507
rank
128,394
PlumX Metrics