Abstract
When almost all underlying assets suddenly lose a certain part of their nominal value in a market crash, the diversification effect of portfolios in a normal market condition no longer works. We integrate the crash risk into portfolio management and investigate performance measures, hedging and optimization of portfolio selection involving derivatives. A suitable convex conic programming framework based on parametric approximation method is proposed to make the problem a tractable one. Simulation analysis and empirical study are performed to test the proposed approach.
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