Monte-Carlo Estimations of the Downside Risk of Derivative Portfolios
Leoni, Patrick (2007) Monte-Carlo Estimations of the Downside Risk of Derivative Portfolios. .
We simulate the performance of a standard derivatives portfolio to evaluate the relevance of benchmarking in terms of doenside risk reduction. The simulation shows that benchmarking always leads to significantly more servere losses in average than those generated by letting the portfolio reach the end of a given horizon. Moreover, switching from a 0-correlation across underlyings to a very mild form of correclation significantly increased the probability of reaching the downside benchmark before maturity, whereas aadding more correlation does not significantly increase this figure.
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