On the financial interpretation of risk contributions: An analysis using Quantile Simulation

DOI: 10.1080/10293523.2019.1643126
Author(s): Simon du PlooyCentre for Business Mathematics and Informatics, Faculty of Natural Sciences, South Africa


This paper tests whether the financial interpretation of risk contributions (Qian, 2006), as measured by marginal change in volatility, holds when accounting for fat tails in the asset return distributions. This important result is the theoretical foundation of risk-based portfolios, but relies on the assumption of normality. If the result does not hold, more sophisticated techniques are required to estimate risk-based portfolios.

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