Details
| Original language | English |
|---|---|
| Pages (from-to) | 141-168 |
| Number of pages | 28 |
| Journal | Decisions in Economics and Finance |
| Volume | 34 |
| Issue number | 2 |
| Publication status | Published - 1 Nov 2011 |
| Externally published | Yes |
Abstract
In this paper, we empirically investigate the consequences of domestic systemic risk for stock market investors. To tackle this issue, we consider two different investment strategies. One strategy is to be "crisis-conscious", i. e., taking the possibility of systemic events into account, and the other one is to be "crisis-ignorant" and thus disregarding systemic risk. We compare the optimal portfolio choices and investment results of these strategies in an historical simulation, using almost three decades of historical stock price data. Our main findings are as follows: the crisis-conscious investor tends to choose less extreme portfolio weights for individual stocks than the ignorant investor. The overall risky investment is, however, of similar size for both. By ignoring the possibility of systemic events, the crisis-ignorant strategy performs significantly worse from the viewpoint of expected return as well as expected utility.
Keywords
- Optimal portfolio choice, Systemic risk
ASJC Scopus subject areas
- Economics, Econometrics and Finance(all)
- Finance
- Economics, Econometrics and Finance(all)
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In: Decisions in Economics and Finance, Vol. 34, No. 2, 01.11.2011, p. 141-168.
Research output: Contribution to journal › Article › Research › peer review
}
TY - JOUR
T1 - Optimal portfolio choice in the presence of domestic systemic risk
T2 - Empirical evidence from stock markets
AU - Prokopczuk, Marcel
PY - 2011/11/1
Y1 - 2011/11/1
N2 - In this paper, we empirically investigate the consequences of domestic systemic risk for stock market investors. To tackle this issue, we consider two different investment strategies. One strategy is to be "crisis-conscious", i. e., taking the possibility of systemic events into account, and the other one is to be "crisis-ignorant" and thus disregarding systemic risk. We compare the optimal portfolio choices and investment results of these strategies in an historical simulation, using almost three decades of historical stock price data. Our main findings are as follows: the crisis-conscious investor tends to choose less extreme portfolio weights for individual stocks than the ignorant investor. The overall risky investment is, however, of similar size for both. By ignoring the possibility of systemic events, the crisis-ignorant strategy performs significantly worse from the viewpoint of expected return as well as expected utility.
AB - In this paper, we empirically investigate the consequences of domestic systemic risk for stock market investors. To tackle this issue, we consider two different investment strategies. One strategy is to be "crisis-conscious", i. e., taking the possibility of systemic events into account, and the other one is to be "crisis-ignorant" and thus disregarding systemic risk. We compare the optimal portfolio choices and investment results of these strategies in an historical simulation, using almost three decades of historical stock price data. Our main findings are as follows: the crisis-conscious investor tends to choose less extreme portfolio weights for individual stocks than the ignorant investor. The overall risky investment is, however, of similar size for both. By ignoring the possibility of systemic events, the crisis-ignorant strategy performs significantly worse from the viewpoint of expected return as well as expected utility.
KW - Optimal portfolio choice
KW - Systemic risk
UR - http://www.scopus.com/inward/record.url?scp=80052959487&partnerID=8YFLogxK
U2 - 10.1007/s10203-011-0111-5
DO - 10.1007/s10203-011-0111-5
M3 - Article
AN - SCOPUS:80052959487
VL - 34
SP - 141
EP - 168
JO - Decisions in Economics and Finance
JF - Decisions in Economics and Finance
SN - 1593-8883
IS - 2
ER -