Trading Strategy Performance When Using Value at Risk or Expected Shortfall as a Risk Constraint

49 Pages Posted: 31 Mar 2002

See all articles by Nuttawat Visaltanachoti

Nuttawat Visaltanachoti

Massey University - Department of Economics and Finance

Yuxing Yan

SUNY at Geneseo - John Wiley Jones School of Business

Date Written: February 28, 2002

Abstract

This paper studies the performance of three trading strategies: the sample Sharpe ratio, the momentum and the contrarian strategies subjected to the value at risk and expected shortfall constraint using 30 or 90 stocks with an equal weight or mean-variance optimization allocation. The results show that imposing the risk constraint deteriorates the performance, except for the case of using Sharpe ratio as a stock selection criteria. However, both unconstrained and constrained strategies outperform the market, especially for the contrarian strategies. However under the risk constrained strategies, the value at risk constraint strategy performs better than the expected shortfall constraint strategies. Moreover, the performance is improved when we use mean-variance optimization allocation and allow for leveraging.

Keywords: Value at risk, portfolio performance, asset allocation

JEL Classification: G10, G11

Suggested Citation

Visaltanachoti, Nuttawat and Yan, Yuxing, Trading Strategy Performance When Using Value at Risk or Expected Shortfall as a Risk Constraint (February 28, 2002). Available at SSRN: https://ssrn.com/abstract=302319 or http://dx.doi.org/10.2139/ssrn.302319

Nuttawat Visaltanachoti (Contact Author)

Massey University - Department of Economics and Finance ( email )

School of Economics and Finance
Private Bag 102904, NSMC
Auckland
New Zealand
64 9 414 0800 (43169) (Phone)
64 9 441 8177 (Fax)

Yuxing Yan

SUNY at Geneseo - John Wiley Jones School of Business ( email )

Geneseo, NY 14454
United States

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