Downside Risk Control and Optimal Investment Turnover Around Financial Crises

International Journal of Portfolio Analysis and Management, Forthcoming

26 Pages Posted: 3 Apr 2018

See all articles by Ruilin Tian

Ruilin Tian

North Dakota State University - Department of Accounting, Finance, and Information Systems

Fariz Huseynov

North Dakota State University - College of Business

Wei Zhang

North Dakota State University

Date Written: February 22, 2018

Abstract

This paper investigates tactical investment strategies for investors to survive financial crises. Compared with the buy-and-hold strategy, the buy-and-sell strategy is much more effective in mitigating downside risk before, during, and after a crisis by restricting the left-tail volatility of portfolio returns through CVaR constraints. The paper also studies investors’ optimal turnovers around a crisis under the buy-and-hold strategy. Considering investors’ heterogeneous behaviors, we find the wealth-weighted average optimal turnover across all investors during a crisis is much higher than that before or after the crisis. This indicates investors who enter the market before a crisis may be better off by leaving their portfolios untouched during the market downturn. In addition, the downside risk control model can detect a market downturn earlier than the mean-variance model, therefore it helps to “spread out” the required asset adjustments over a longer horizon than the crisis period itself.

Keywords: Financial crisis, Global diversification, Downside risk management, CVaR, Turnover

JEL Classification: C61, F3, F65, G11

Suggested Citation

Tian, Ruilin and Huseynov, Fariz and Zhang, Wei, Downside Risk Control and Optimal Investment Turnover Around Financial Crises (February 22, 2018). International Journal of Portfolio Analysis and Management, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3152652

Ruilin Tian (Contact Author)

North Dakota State University - Department of Accounting, Finance, and Information Systems ( email )

Fargo, ND
United States
7012316544 (Phone)
7012316545 (Fax)

Fariz Huseynov

North Dakota State University - College of Business ( email )

Department of Acctg, Finance & Information Systems
Fargo, ND 58108
United States
+17012315074 (Phone)

Wei Zhang

North Dakota State University ( email )

Fargo, ND 58105
United States

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