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Diversification benefits of risk portfolio models: a case of Taiwan’s stock market

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Abstract

How to construct effective investment strategies is a core issue for modern finance. In this paper, we investigate the benefits of various models by rebalancing portfolios using the daily stock return data in Taiwan. We further consider investment constraints in portfolios to ensure the feasibility of their applications. Using five performance criteria, we find the risk models, particularly the CVaR, yield higher ex ante and ex post performance than a naïve buy-and-hold portfolio. The two-stage regressions show that high return benefits are associated with a bear market while high reduction in risk is positively related to high volatility. Though VaR is regarded as a standard model applied in the real world, our findings suggest that CVaR can serve as a good alternative.

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Notes

  1. See Frankfurter et al. (1999), Li et al. (2003), and Woodside-Oriakhi et al. (2013) for detailed discussion.

  2. Coherent risk measure means a risk measure have four desired properties: monotonicity, sub-additivity, homogeneity, and translational invariance. See Rockafellar et al. (2006) for detailed discussion.

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Acknowledgments

The author would like to thank Cheng-Few Lee (the editor), anonymous referees, Ted Moorman, and participants at the Financial Management Association Annual Meeting in Nashville for helpful comments and suggestions. The usual disclaimer applies.

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Authors and Affiliations

  1. National Chi-Nan University, Nantou, 54565, Taiwan

    Jing-Rung Yu & Jian-Hong Yang

  2. Northeastern University, Boston, MA, 02115, USA

    Wan-Jiun Paul Chiou

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  1. Jing-Rung Yu
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  2. Wan-Jiun Paul Chiou
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  3. Jian-Hong Yang
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Correspondence to Wan-Jiun Paul Chiou.

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Yu, JR., Chiou, WJ.P. & Yang, JH. Diversification benefits of risk portfolio models: a case of Taiwan’s stock market. Rev Quant Finan Acc 48, 467–502 (2017). https://doi.org/10.1007/s11156-016-0558-0

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