Article ID | Journal | Published Year | Pages | File Type |
---|---|---|---|---|
5077273 | Insurance: Mathematics and Economics | 2008 | 6 Pages |
Abstract
This paper analyzes portfolio diversification for nonlinear transformations of heavy-tailed risks. It is shown that diversification of a portfolio of convex functions of heavy-tailed risks increases the portfolio's riskiness if expectations of these risks are infinite. In contrast, for concave functions of heavy-tailed risks with finite expectations, the stylized fact that diversification is preferable continues to hold. The framework of transformations of heavy-tailed risks includes many models with Pareto-type distributions that exhibit local or moderate deviations from power tails in the form of additional slowly varying or exponential factors. The class of distributions under study is therefore extended beyond the stable class.
Keywords
Related Topics
Physical Sciences and Engineering
Mathematics
Statistics and Probability
Authors
Rustam Ibragimov, Johan Walden,