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2015 | OriginalPaper | Chapter

45. Optimal Asset Allocation Under VaR Criterion: Taiwan Stock Market

Authors : Ken Hung, Suresh Srivastava

Published in: Handbook of Financial Econometrics and Statistics

Publisher: Springer New York

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Abstract

Value at risk (VaR) measures the worst expected loss over a given time horizon under normal market conditions at a specific level of confidence. These days, VaR is the benchmark for measuring, monitoring, and controlling downside financial risk. VaR is determined by the left tail of the cumulative probability distribution of expected returns. Expected probability distribution can be generated assuming normal distribution, historical simulation, or Monte Carlo simulation. Further, a VaR-efficient frontier is constructed, and an asset allocation model subject to a target VaR constraint is examined.

This paper examines the riskiness of the Taiwan stock market by determining the VaR from the expected return distribution generated by historical simulation. Our result indicates the cumulative probability distribution has a fatter left tail, compared with the left tail of a normal distribution. This implies a riskier market. We also examined a two-sector asset allocation model subject to a target VaR constraint. The VaR-efficient frontier of the TAIEX traded stocks recommended mostly a corner portfolio.

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Extensive discussion of value at risk can be found in Basak and Shapiro (2001), Beder (1995), Dowd (1998), Fong and Vasicek (1997), Hendricks (1996), Hoppe (1999), Jorion (1997, 1997), Schachter (1998), Smithson and Minton (1996a, b), and Talmor (1996).

Institutional use of VaR can be found in Basel (1995, 1998a, b, c, 1999), Danielsson et al. (1998), and Danielsson Hartmann and de Vries (1998).

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Title: Optimal Asset Allocation Under VaR Criterion: Taiwan Stock Market
Authors: Ken Hung
Suresh Srivastava
Publisher: Springer New York
Book: Handbook of Financial Econometrics and Statistics
Print ISBN: 978-1-4614-7749-5

Electronic ISBN: 978-1-4614-7750-1

Copyright Year: 2015
DOI: https://doi.org/10.1007/978-1-4614-7750-1_45