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J. Risk Financial Manag. 2016, 9(2), 6; doi:10.3390/jrfm9020006

Down-Side Risk Metrics as Portfolio Diversification Strategies across the Global Financial Crisis

School of Mathematics and Statistics, the University of Sydney, and Center for Applied Financial Studies, University of South Australia, Adelaide, Australia
Department of Quantitative Finance National Tsing Hua University Taiwan and Econometric Institute Erasmus School of Economics Erasmus University Rotterdam and Tinbergen Institute The Netherlands and Department of Quantitative Economics, Complutense University of Madrid, Spain
School of Business and Law, Edith Cowan University, Australia
Author to whom correspondence should be addressed.
Academic Editors: Stefan Mittnik and Marc S. Paolella
Received: 31 October 2015 / Revised: 30 March 2016 / Accepted: 11 April 2016 / Published: 21 June 2016
(This article belongs to the Special Issue Advances in Modeling Value at Risk and Expected Shortfall)
View Full-Text   |   Download PDF [887 KB, uploaded 21 June 2016]   |  


This paper features an analysis of the effectiveness of a range of portfolio diversification strategies, with a focus on down-side risk metrics, as a portfolio diversification strategy in a European market context. We apply these measures to a set of daily arithmetically-compounded returns, in U.S. dollar terms, on a set of ten market indices representing the major European markets for a nine-year period from the beginning of 2005 to the end of 2013. The sample period, which incorporates the periods of both the Global Financial Crisis (GFC) and the subsequent European Debt Crisis (EDC), is a challenging one for the application of portfolio investment strategies. The analysis is undertaken via the examination of multiple investment strategies and a variety of hold-out periods and backtests. We commence by using four two-year estimation periods and a subsequent one-year investment hold out period, to analyse a naive 1/N diversification strategy and to contrast its effectiveness with Markowitz mean variance analysis with positive weights. Markowitz optimisation is then compared to various down-side investment optimisation strategies. We begin by comparing Markowitz with CVaR, and then proceed to evaluate the relative effectiveness of Markowitz with various draw-down strategies, utilising a series of backtests. Our results suggest that none of the more sophisticated optimisation strategies appear to dominate naive diversification. View Full-Text
Keywords: portfolio diversification; Markowitz analysis; downside risk; CVaR; draw-down portfolio diversification; Markowitz analysis; downside risk; CVaR; draw-down

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This is an open access article distributed under the Creative Commons Attribution License which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited. (CC BY 4.0).

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Allen, D.E.; McAleer, M.; Powell, R.J.; Singh, A.K. Down-Side Risk Metrics as Portfolio Diversification Strategies across the Global Financial Crisis. J. Risk Financial Manag. 2016, 9, 6.

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