Estimating Portfolio Risk for Tail Risk Protection Strategies

Happersberger, David and Lohre, Harald and Nolte, Ingmar (2020) Estimating Portfolio Risk for Tail Risk Protection Strategies. European Financial Management, 26 (4). pp. 1107-1146. ISSN 1354-7798

Text (Estimating Portfolio Risk for Tail Risk Protection Strategies)
Estimating_Portfolio_Risk_for_Tail_Risk_Protection_Strategies.pdf - Accepted Version
Available under License Creative Commons Attribution.
Download (3MB)

Abstract

We forecast portfolio risk for managing dynamic tail risk protection strategies, based on extreme value theory, expectile regression, Copula-GARCH and dynamic GAS models. Utilizing a loss function that overcomes the lack of elicitability for Expected Shortfall, we propose a novel Expected Shortfall (and Value-at-Risk) forecast combination approach, which dominates simple and sophisticated standalone models as well as a simple average combination approach in modelling the tail of the portfolio return distribution. While the associated dynamic risk targeting or portfolio insurance strategies provide effective downside protection, the latter strategies suffer less from inferior risk forecasts given the defensive portfolio insurance mechanics.