Downside Risk Control and Optimal Investment Turnover Around Financial Crises
International Journal of Portfolio Analysis and Management, Forthcoming
26 Pages Posted: 3 Apr 2018
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
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