Asymptotic Dynamics and Value-at-Risk of Large Diversified Portfolios in a Jump-Diffusion Market

Author

Kian Guan Lim, Singapore Management UniversityFollow
Xiaoqing Liu, National University of Singapore
Kai Chong Tsui, Singapore Management UniversityFollow

Publication Type

Working Paper

Version

publishedVersion

Publication Date

9-2003

Abstract

This paper studies the modelling of large diversi ed portfolios in a nancial market with jump-di usion risks. The portfolios considered include three categories: equal money-weighted portfolios, risk minimizing portfolios, and market indices. Reduced-form dynamics driven jointly by one Brownian Motion and one Poisson process are derived for the asymptotics of such portfolios. We prove that derivatives written on a portfolio can be priced by treating the asymptotic dynamics as the underlying process if the number of assets in the portfolio is su ciently large. Analytical and Monte Carlo Value-at-Risk (VaR) can be computed for the portfolios based on their asymptotic dynamics.

Discipline

Corporate Finance | Finance and Financial Management | Portfolio and Security Analysis

Research Areas

Finance

Citation

Lim, Kian Guan; Liu, Xiaoqing; and Tsui, Kai Chong. Asymptotic Dynamics and Value-at-Risk of Large Diversified Portfolios in a Jump-Diffusion Market. (2003).
Available at: https://ink.library.smu.edu.sg/lkcsb_research/1910

Creative Commons License

This work is licensed under a Creative Commons Attribution-NonCommercial-No Derivative Works 4.0 International License.