Defensive Portfolio Construction Based on Extreme
Value at Risk

Abstract

In this article, the authors compare the characteristics of a low-volatility strategy and low-risk strategies based on extreme Value at Risk (eVaR) constructed from a large universe of international stocks in the period from 1995 to 2015. They find that low-eVaR strategies have better risk and performance statistics exhibiting a less-pronounced sector concentration, a common problem in low-volatility portfolios. Although they find no significant differences in the structure of the risk premium conditioned on periods of economic expansions, the authors do find some differences conditioned on times of recessions. However, their analysis cannot explain the improved downside risk profile that remains a strategy-specific characteristic, caused most likely by the more diversified sector allocation. Their findings are robust to variations in the methodology of eVaR calculation.

TOPICS: Analysis of individual factors/risk premia, VAR and use of alternative risk measures of trading risk, emerging