Risk Contributions and Realised Losses: An Analysis Using Quantile Simulation
21 Pages Posted: 28 Jun 2018
Date Written: June 12, 2018
This paper tests whether the economic interpretation of risk contributions, as measure by marginal change in volatility, is true when accounting for fat tails in the asset return distributions (Qian, 2006). This is relevant to portfolio managers that have an expectation that risk and loss contributions will be approximately equal. A simulation study is conducted to replicate the environment required by the proof. The Quantile Simulation method is used to simulate asset return distributions that are reasonable replicates of the empirical samples. Given the relative novelty of the method, this paper also reports the extent to which the simulated samples are able to approximate the empirical sample of each asset.
Keywords: risk budget, risk contribution, quantile regression, quantile simulation, realised loss
JEL Classification: C02, C15, C63, G61
Suggested Citation: Suggested Citation