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Background Risk Models and Stepwise Portfolio Construction

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Abstract

Assuming the multiplicative background risk model, which has been a popular model due to its practical applicability and technical tractability, we develop a general framework for analyzing portfolio performance based on its subportfolios. Since the performance of subportfolios is easier to assess, the herein developed stepwise portfolio construction (SPC) provides a powerful alternative to a number of traditional portfolio construction methods. Within this framework, we discuss a number of multivariate risk models that appear in the actuarial and financial literature. We provide numerical and graphical examples that illustrate the SPC technique and facilitate our understanding of the herein developed general results.

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Authors and Affiliations

  1. Cass Business School, City University, London, EC1Y 8TZ, UK

    Alexandru V. Asimit

  2. Faculty of Mathematics and Computer Science, Ovidius University of Constanta, 124 Mamaia Blvd, 900527, Constanta, Romania

    Raluca Vernic

  3. Institute of Mathematical Statistics and Applied Mathematics, 13 Septembrie 13, 050711, Bucharest, Romania

    Raluca Vernic

  4. Department of Statistical and Actuarial Sciences, University of Western Ontario, London, Ontario, N6A 5B7, Canada

    Ricardas Zitikis

Authors
  1. Alexandru V. Asimit
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  2. Raluca Vernic
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  3. Ricardas Zitikis
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Correspondence to Raluca Vernic.

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Asimit, A.V., Vernic, R. & Zitikis, R. Background Risk Models and Stepwise Portfolio Construction. Methodol Comput Appl Probab 18, 805–827 (2016). https://doi.org/10.1007/s11009-015-9458-3

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  • DOI: https://doi.org/10.1007/s11009-015-9458-3

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