Methodology and Computing in Applied Probability

, Volume 18, Issue 3, pp 805–827 | Cite as

Background Risk Models and Stepwise Portfolio Construction

  • Alexandru V. Asimit
  • Raluca Vernic
  • Ricardas Zitikis
Article

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.

Keywords

Portfolio construction Background risk Systemic risk Laplace transform Risk management Capital allocation 

Mathematics Subject Classifications (2010)

62H05 91B30 44A10 

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Copyright information

© Springer Science+Business Media New York 2015

Authors and Affiliations

  • Alexandru V. Asimit
    • 1
  • Raluca Vernic
    • 2
    • 3
  • Ricardas Zitikis
    • 4
  1. 1.Cass Business SchoolCity UniversityLondonUK
  2. 2.Faculty of Mathematics and Computer ScienceOvidius University of ConstantaConstantaRomania
  3. 3.Institute of Mathematical Statistics and Applied MathematicsBucharestRomania
  4. 4.Department of Statistical and Actuarial SciencesUniversity of Western OntarioLondonCanada

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