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Tail Risk Management

Vineer Bhansali
The Journal of Portfolio Management Summer 2008, 34 (4) 68-75; DOI: https://doi.org/10.3905/jpm.2008.709982
Vineer Bhansali
A portfolio manager and the head of Analytics at PIMCO in Newport Beach, CA.
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Abstract

In the current deleveraging episode, the severity and simultaneous realization of low-probability events across a number of strategies has brought portfolio tail-risk hedging to the center of investors' attention. In this article, the author discusses the basic principles and implementation considerations behind portfolio tail-risk management, emphasizing the importance of viewing tail risk as the consequence of a systemic shock during which normally uncorrelated markets become correlated due to a reduction in liquidity. This approach suggests that tail risk should be measured by performing macro scenario analysis and that hedges should be picked based on their cost and joint performance in periods of stress relative to the portfolio being hedged. Since liquidity reduction is a typical consequence of systemic shocks, the author also discusses specific operational issues that come to the fore in such events.

TOPICS: Tail risks, portfolio construction, analysis of individual factors/risk premia

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The Journal of Portfolio Management
Vol. 34, Issue 4
Summer 2008
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Tail Risk Management
Vineer Bhansali
The Journal of Portfolio Management Jul 2008, 34 (4) 68-75; DOI: 10.3905/jpm.2008.709982

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Tail Risk Management
Vineer Bhansali
The Journal of Portfolio Management Jul 2008, 34 (4) 68-75; DOI: 10.3905/jpm.2008.709982
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