Title: Downside risk control and optimal investment turnover around financial crises

Authors: Ruilin Tian; Fariz Huseynov; Wei Zhang

Addresses: Department of Accounting, Finance and Info Systems, North Dakota State University, P.O. Box 6050, Fargo, ND 58108, USA ' Department of Accounting, Finance and Info Systems, North Dakota State University, P.O. Box 6050, Fargo, ND 58108, USA ' Department of Accounting, Finance and Info Systems, North Dakota State University, P.O. Box 6050, Fargo, ND 58108, USA

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.

Keywords: financial crisis; global diversification; downside risk management; CVaR; investment turnover; portfolio analysis.

DOI: 10.1504/IJPAM.2018.092646

International Journal of Portfolio Analysis and Management, 2018 Vol.2 No.2, pp.141 - 168

Received: 11 Oct 2017
Accepted: 20 Feb 2018
Published online: 26 Jun 2018 *

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