Downside risk control and optimal investment turnover around financial crises (original) (raw)

International Journal of Portfolio Analysis and Management, 2018

Abstract

This paper investigates tactical investment strategies for investors to survive financial crises. Compared with the buy-and-hold strategy, the buy-and-sell strategy is much more effective in mitigating downside risk before, during, and after a crisis by restricting the left-tail volatility of portfolio returns through CVaR constraints. The paper also studies investors' optimal turnovers around a crisis under the buy-and-hold strategy. Considering investors' heterogeneous behaviours, we find the wealth-weighted average optimal turnover across all investors during a crisis is much higher than that before or after the crisis. This indicates investors who enter the market before a crisis may be better off by leaving their portfolios untouched during the market downturn. In addition, the downside risk control model can detect a market downturn earlier than the mean-variance model therefore it helps to 'spread out' the required asset adjustments over a longer horizon than the crisis period itself.

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