Tail Conditional Variance of Portfolio and Applications in Financial Engineering

The optimal portfolio selection is an important issue in financial engineering. It is well-known that downside risk measures such as TCE and CVaR only characterize the tail expectation, and pay no attention to the tail variance beyond the VaR. This is an important deficiency of measuring the extreme financial risk in engineering management, especially for insurance industry and portfolio management. In this paper, we study the optimization portfolio model based on tail conditional variance (TCV) motivated by TCE. We obtain the TCV risk of a portfolio and the explicit solution of optimal portfolio under the assumption of multivariate student t distribution. Finally, we also give an example of empirical study on China Stock Market.