Trading Strategy Performance When Using Value at Risk or Expected Shortfall as a Risk Constraint
49 Pages Posted: 31 Mar 2002
Date Written: February 28, 2002
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: Suggested Citation