Abstract
This chapter discusses the application of a new method to the Sensitivity Analysis (SA) of portfolio properties and proposes an SA scheme that is capable of assessing the joint impact of changes in portfolio composition on portfolio volatility (σ p ).
We would like to thank Simone Manganelli for providing us with data and basic MatLab codes, and participants at EWFM (Brescia, May 2005) for useful comments on an earlier draft. We also thank Guillermo Baquero for precious comments at the EFMA conference (Milan, 2005). Financial support from Bocconi University is gratefully acknowledged.
Access this chapter
Tax calculation will be finalised at checkout
Purchases are for personal use only
Preview
Unable to display preview. Download preview PDF.
References
Black, F. and Scholes, M. (1973) “The Pricing of Options and Corporate Liabilities”, Journal of Political Economy, 81 (3): 637–54.
Bollerslev, T. (1986) “Generalized Autoregressive Conditional Heteroskedasticity”, Journal of Econometrics, 31: 307–27.
Bollerslev, T. and Engle, R.F. (1993) “Common Persistence in Conditional Variances”, Econometrica, 61 (1): 167–86.
Borgonovo, E. (2001) “Risk-Informed Decision Making: Sensitivity Analysis and Applications”, Ph.D thesis, Massachusetts Institute of Technology.
Borgonovo, E. and Apostolakis, G.E. (2001) “A New Importance Measure for Risk- Informed Decision-Making”, Reliability Engineering and System Safety, 72 (2): 193–212.
Borgonovo, E. and Apostolakis, G.E. (2001) “On Local Sensitivity Measures”, Proceedings of Sensitivity Analysis of Model Output, Madrid, Spain.
Borgonovo, E. and Peccati, L. (2004) “Sensitivity Analysis in Investment Project Evaluation”, International Journal of Production Economics, 90: 17–25.
Borgonovo, E. (2001) “Importance Relations and Sensitivity Analysis in Decision Theory”, Proceedings of the Tenth International Conference on Foundations and Applications of Utility, Risk and Decision Theory, Torino, 30 May-2 June 2001, pp. 20–3.
Borgonovo, E. and Peccati, L. (2004) “The Importance of Assumptions in Investment Evaluation”, International Journal of Production Economics, 90: 17–25.
Campbell, J.Y., Lo, A.W. and MacKinlay, A.C. (1997) The Econometrics of Financial Markets (Princeton, NJ: Princeton University Press).
Campolongo, F. and Saltelli, A. (1997) “Sensitivity Analysis of an Environmental Model: an Application of Different Analysis Methods”, Reliability Engineering and System Safety, 57: 49–69.
Cheok, M.C., Parry, G.W. and Sherry, R.R. (1998) “Use of Importance Measures in Risk Informed Regulatory Applications”, Reliability Engineering and System Safety, 60: 213–26.
Drudi, F., Generale, A. and Majnoni, G. (1997) “Sensitivity of VaR Measures to Different Risk Models”, Banca d’Italia, Terni di discussione, no. 317.
Duan, J.-C. (1995) “The GARCH Option Pricing Model”, Mathematical Finance, 5: 13–32.
Duan, J.-C. and Zhang, H. (2001) “Pricing Hang Seng Index Options around the Asian Financial Crisis–A GARCH Approach”, Journal of Banking and Finance, 25 (11): 1989–2014.
Engle, R.F. (1982) “Autoregressive Conditional Heteroskedasticity with Estimates of the Variance of the United Kingdom Inflation”, Econometrica, 50: 987–1007.
Engle, R.F. and Merzich, J. (1996) “GARCH for Groups”, RISK, August: 36–40.
Gourieroux, C., Laurent, J.P. and Scaillet, O. (2000) “Sensitivity Analysis of Values at Risk”, Journal of Empirical Finance, 7: 225–45.
Hull, J.C. (1999) Options, Futures and Other Derivatives (Upper Saddle River, NJ: Prentice-Hall).
Manganelli, S. (2004) “Asset Allocation by Variance Sensitivity Analysis”, Journal of Financial Econometrics, 2 (3): 370–89.
Manganelli, S., Ceci, V. and Vecchiato, W. (2002) “Sensitivity Analysis of Volatility: A New Tool for Risk Management”, European Central Bank, Working Paper Series, Working Paper no. 194.
McNeil A.J. and Frey, R. (2000) “Estimation of Tail Related Risk Measures for Heteroskedastic Financial Time Series: An Extreme Value Approach”, Journal of Empirical Finance, 7 (3–4): 271–300
Noh, J. (1997) “Small Sample Properties of GARCH(1,1) Estimator Under Non-normality”, Economics Letters, 55: 161–4.
Saltelli, A. (1997) “The Role of Sensitivity Analysis in the Corroboration of Models and its Link to Model Structural and Parametric Uncertainty”, Reliability Engineering and System Safety, 57: 1–4.
Saltelli, A. (1999) “Sensitivity Analysis: Could Better Methods be Used?”, Journal of Geophysical Research, 104: 3789–93.
Saltelli, A. (2003) “Introduction to Variance-Based Sensitivity Analysis”, JRC, mimeo.
Saltelli, A., Tarantola, S. and Chan, K.P.S. (1999) “A Quantitative Model-Independent Method for Global Sensitivity Analysis of Model Output”, Technometrics, 41 (1): 39–56.
Shephard, N. (2005) “Stochastic Volatility”, in N. Shephard (ed.), Advanced Texts in Econometrics (Oxford: Oxford University Press).
Simon, C.P. and Blume, L. (1994) Mathematics for Economists (New York: W.W. Norton & Co.).
Taggart, R.A. (1996) Quantitative Analysis for Investment Management (Upper Saddle River, NJ: Prentice-Hall).
Turanyi, T. and Rabitz, H. (2000) “Local Methods”, in A. Saltelli, K. Chan and E.M. Scott (eds), Sensitivity Analysis (Chichester, UK: John Wiley & Sons).
Wang, Z. (1998) “Efficiency Loss and Constraints on Portfolio Holding”, Journal of Financial Economics, 48 (3): 359–75.
Editor information
Editors and Affiliations
Copyright information
© 2007 Emanuele Borgonovo and Marco Percoco
About this chapter
Cite this chapter
Borgonovo, E., Percoco, M. (2007). Sensitivity Analysis of Portfolio Volatility: Importance of Weights, Sectors and Impact of Trading Strategies. In: Gregoriou, G.N. (eds) Advances in Risk Management. Finance and Capital Markets Series. Palgrave Macmillan, London. https://doi.org/10.1057/9780230625846_3
Download citation
DOI: https://doi.org/10.1057/9780230625846_3
Publisher Name: Palgrave Macmillan, London
Print ISBN: 978-1-349-28543-3
Online ISBN: 978-0-230-62584-6
eBook Packages: Palgrave Economics & Finance CollectionEconomics and Finance (R0)