Systemic risk of optioned portfolio: controllability and optimization

DOI10.1016/J.JEDC.2023.104701arXiv2209.04685MaRDI QIDQ6094474FDOQ6094474

Authors: Xiaochuan Pang, Shushang Zhu, Xueting Cui, Jiali Ma 

Publication date: 14 September 2023

Published in: Journal of Economic Dynamics and Control (Search for Journal in Brave)

Abstract: We investigate the portfolio selection problem against the systemic risk which is measured by CoVaR. We first demonstrate that the systemic risk of pure stock portfolios is essentially uncontrollable due to the contagion effect and the seesaw effect. Next, we prove that it is necessary and sufficient to introduce options to make the systemic risk controllable by the correlation hedging and the extreme loss hedging. In addition to systemic risk control, we show that using options can also enhance return-risk performance. Then, with a reasonable approximation of the conditional distribution of optioned portfolios, we show that the portfolio optimization problem can be formulated as a second-order cone program (SOCP) that allows for efficient computation. Finally, we carry out comprehensive simulations and empirical tests to illustrate the theoretical findings and the performance of our method.

Full work available at URL: https://arxiv.org/abs/2209.04685

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zbMATH Keywords

controllabilitysystemic riskcontagion effectseesaw effectoptioned asset

Mathematics Subject Classification ID

Statistical methods; risk measures (91G70) Portfolio theory (91G10) Financial networks (including contagion, systemic risk, regulation) (91G45)

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Cited In (2)

• An optimization model for minimizing systemic risk
• Systemic Portfolio Diversification

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