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The Journal of Portfolio Management

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Primary Article

Measuring Downside Portfolio Risk

Frederik Johansson, Michael J. Seiler and Mikael Tjarnberg
The Journal of Portfolio Management Fall 1999, 26 (1) 96-107; DOI: https://doi.org/10.3905/jpm.1999.319773
Frederik Johansson
A research analyst at HSBC Securities, Inc. in New York (NY 10005).
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Michael J. Seiler
Professor of finance at Hawaii Pacific University and a partner at WSB Investment Counsel, Inc. in Honolulu (HI 96813).
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Mikael Tjarnberg
A research analyst at HSBC Securities, Inc. in New York (NY 10005).
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Abstract

Value at risk (VaR) is an approach used in risk management to measure downside risk. Not all VaRs, however, are created equal. Defining and accurately measuring market risk is a considerable task. VaR estimates depend on a number of inputs, including assumptions, data parameters, and methodology. Accordingly, comprehending the optimal use of various input and how they might impact the VaR forecast is necessary to avoid biasing portfolio risk estimates. The authors examine three equity portfolios of varying degrees of diversification, using twenty common VaR models developed through four VaR techniques to clearly demonstrate the ramifications of using inappropriate models. They find that particular characteristics of a portfolio must guide and determine which VaR model may be applied in order to extract accurate VaR estimates. Using the wrong VaR model will bias the behavior of portfolio managers and cause them to be exposed to much more risk than they desire.

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The Journal of Portfolio Management
Vol. 26, Issue 1
Fall 1999
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Measuring Downside Portfolio Risk
Frederik Johansson, Michael J. Seiler, Mikael Tjarnberg
The Journal of Portfolio Management Oct 1999, 26 (1) 96-107; DOI: 10.3905/jpm.1999.319773

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Measuring Downside Portfolio Risk
Frederik Johansson, Michael J. Seiler, Mikael Tjarnberg
The Journal of Portfolio Management Oct 1999, 26 (1) 96-107; DOI: 10.3905/jpm.1999.319773
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