Asymptotic Dynamics and Value-at-Risk of Large Diversified Portfolios in a Jump-Diffusion Market
This paper studies the modelling of large diversified portfolios in a financial market with jump-diffusion 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 sufficiently large. Analytical and Monte Carlo value-at-risk can be computed for the portfolios based on their asymptotic dynamics.
Finance and Financial Management | Portfolio and Security Analysis
Taylor and Francis
LIM, Kian Guan; LIU, Xiaoqing; and TSUI, Kai Chong.
Asymptotic Dynamics and Value-at-Risk of Large Diversified Portfolios in a Jump-Diffusion Market. (2004). Quantitative Finance. 4, (2), 129-139. Research Collection Lee Kong Chian School Of Business.
Available at: http://ink.library.smu.edu.sg/lkcsb_research/2630