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VaR-Efficient Portfolios for a Class of Super- and Sub-Exponentially Decaying Assets Return Distributions

Y. Malevergne·D. Sornette
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Abstract

Using a family of modified Weibull distributions, encompassing both sub-exponentials and super-exponentials, to parameterize the marginal distributions of asset returns and their multivariate generalizations with Gaussian copulas, we offer exact formulas for the tails of the distribution $P(S)$ of returns $S$ of a portfolio of arbitrary composition of these assets. We find that the tail of $P(S)$ is also asymptotically a modified Weibull distribution with a characteristic scale $χ$ function of the asset weights with different functional forms depending on the super- or sub-exponential behavior of the marginals and on the strength of the dependence between the assets. We then treat in details the problem of risk minimization using the Value-at-Risk and Expected-Shortfall which are shown to be (asymptotically) equivalent in this framework.

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Y. Malevergne, D. Sornette. 2003-01-06. VaR-Efficient Portfolios for a Class of Super- and Sub-Exponentially Decaying Assets Return Distributions. https://doi.org/10.1088/1469-7688/4/1/002

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