Optimal portfolio choice in the presence of domestic systemic risk: empirical evidence from stock markets |
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Authors: | Marcel Prokopczuk |
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Institution: | (1) School of Business, Duke University, Durham, NC 27708, USA;(2) NBER, Cambridge, MA 10016, USA |
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Abstract: | In this paper, we empirically investigate the consequences of domestic systemic risk for stock market investors. To tackle
this issue, we consider two different investment strategies. One strategy is to be “crisis-conscious”, i.e., taking the possibility
of systemic events into account, and the other one is to be “crisis-ignorant” and thus disregarding systemic risk. We compare
the optimal portfolio choices and investment results of these strategies in an historical simulation, using almost three decades
of historical stock price data. Our main findings are as follows: the crisis-conscious investor tends to choose less extreme
portfolio weights for individual stocks than the ignorant investor. The overall risky investment is, however, of similar size
for both. By ignoring the possibility of systemic events, the crisis-ignorant strategy performs significantly worse from the
viewpoint of expected return as well as expected utility. |
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Keywords: | |
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