Minimizing Shortfall

Details Minimizing Shortfall Minimizing Shortfall

2011-02-04

arxiv.org/abs/1102.0938v1

Goldberg, Lisa R., Hayes, Michael Y. and Mahmoud, Ola. Minimizing Shortfall, January 2011 (January 26, 2011). MSCI Barra Resea

Economy

Quantitative Finance

Portfolio Management

Scientific paper

This paper describes an empirical study of shortfall optimization with Barra Extreme Risk. We compare minimum shortfall to minimum variance portfolios in the US, UK, and Japanese equity markets using Barra Style Factors (Value, Growth, Momentum, etc.). We show that minimizing shortfall generally improves performance over minimizing variance, especially during down-markets, over the period 1985-2010. The outperformance of shortfall is due to intuitive tilts towards protective factors like Value, and away from aggressive factors like Growth and Momentum. The outperformance is largest for the shortfall that measures overall asymmetry rather than the extreme losses.

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