Risk Contributions and Realised Losses: An Analysis Using Quantile Simulation

21 Pages Posted: 28 Jun 2018

See all articles by Simon du Plooy

Simon du Plooy

North West University; Corion Capital

Date Written: June 12, 2018

Abstract

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

du Plooy, Simon Johannes, Risk Contributions and Realised Losses: An Analysis Using Quantile Simulation (June 12, 2018). Available at SSRN: https://ssrn.com/abstract=3184526 or http://dx.doi.org/10.2139/ssrn.3184526

Simon Johannes Du Plooy (Contact Author)

North West University ( email )

Hoffman Street
Potchefstroom, 2520
South Africa

HOME PAGE: http://natural-sciences.nwu.ac.za/bmi

Corion Capital ( email )

41 Sir Lowry Road
Foreshore
Cape Town, Western Cape 7925
South Africa

HOME PAGE: http://www.corion.co.za

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