Postmodern Portfolio Theory: Navigating Abnormal Markets and Investor Behavior

by James Ming Chen

Overview

This survey of portfolio theory, from its modern origins through more sophisticated, “postmodern” incarnations, evaluates portfolio risk according to the first four moments of any statistical distribution: mean, variance, skewness, and excess kurtosis. In pursuit of financial models that more accurately describe abnormal markets and investor psychology, this book bifurcates beta on either side of mean returns. It then evaluates this traditional risk measure according to its relative volatility and correlation components. After specifying a four-moment capital asset pricing model, this book devotes special attention to measures of market risk in global banking regulation.

Despite the deficiencies of modern portfolio theory, contemporary finance continues to rest on mean-variance optimization and the two-moment capital asset pricing model. The term postmodern portfolio theory captures many of the advances in financial learning since the original articulation ofmodern portfolio theory. A comprehensive approach to financial risk management must address all aspects of portfolio theory, from the beautiful symmetries of modern portfolio theory to the disturbing behavioral insights and the vastly expanded mathematical arsenal of the postmodern critique. Mastery of postmodern portfolio theory’s quantitative tools and behavioral insights holds the key to the efficient frontier of risk management.

Product Details

ISBN-13:	9781137544636
Publisher:	Palgrave Macmillan US
Publication date:	08/10/2016
Series:	Quantitative Perspectives on Behavioral Economics and Finance
Edition description:	1st ed. 2016
Pages:	339
Product dimensions:	5.83(w) x 8.27(h) x (d)

About the Author

James Ming Chen holds the Justin Smith Morrill Chair in Law at Michigan State University, USA. He teaches, lectures, and writes widely on law, economics, and regulation. His books, Disaster Law and Policy and Postmodern Portfolio Theory, cover a broad range of issues concerning extreme events and risk management, from natural to financial disasters. He is of counsel to the Technology Law Group of Washington, D.C.; a public member of the Administrative Conference of the United States; and an elected member of the American Law Institute. A magna cum laude graduate of Harvard Law School and a former editor of the Harvard Law Review, Chen also served as a clerk to Justice Clarence Thomas of the Supreme Court of the United States.

Table of Contents

CHAPTER 1 — MODERN PORTFOLIO THEORY.- CHAPTER 2 — POSTMODERN PORTFOLIO THEORY.- CHAPTER 3 — SEDUCED BY SYMMETRY, SMARTER BY HALF.- CHAPTER 4 —THE FULL FINANCIAL TOOLKIT OF PARTIAL SECOND MOMENTS.- CHAPTER 5 — SORTINO, OMEGA, KAPPA: THE ALGEBRA OF FINANCIAL ASYMMETRY.- CHAPTER 6 — SINKING, FAST AND SLOW: RELATIVE VOLATILITY VERSUS CORRELATION TIGHTENING.- CHAPTER 7 — TIME-VARYING BETA: AUTOCORRELATION AND AUTOREGRESSIVE TIME SERIES.- CHAPTER 8 — ASYMMETRIC VOLATILITY AND VOLATILITY SPILLOVERS.- CHAPTER 9 — A FOUR-MOMENT CAPITAL ASSET PRICING MODEL.- CHAPTER 10 — THE PRACTICAL IMPLICATIONS OF A SPATIALLY BIFURCATED FOUR-MOMENT CAPITAL ASSET PRICING MODEL.- CHAPTER 11 — GOING TO EXTREMES: LEPTOKURTOSIS AS AN EPISTEMIC THREAT.- CHAPTER 12 — PARAMETRIC VALUE-AT-RISK (VAR) ANALYSIS.- CHAPTER 13 — PARAMETRIC VAR ACCORDING TO STUDENT’S T-DISTRIBUTION.- CHAPTER 14 — COMPARING STUDENT’S T-DISTRIBUTION WITH THE LOGISTIC DISTRIBUTION
CHAPTER 15 — EXPECTED SHORTFALL AS A RESPONSE TOMODEL RISK.- CHAPTER 16 —LATENT PERILS: STRESSED VAR, ELICITABILITY, AND SYSTEMIC RISK.- CONCLUSION: FINANCE AS A ROMANCE OF MANY MOMENTS.

What People are Saying About This

From the Publisher

“Chen’s work offers an unparalleled view of portfolio theory and its subtleties from one of America’s leading experts in the field. A must read.” (Chris Brummer, Professor and Director, Institute of International Economic Law, Georgetown University Law Center, USA)

“Chen offers fascinating insight into the fundamentals of corporate finance and behavioral economics. His arguments are rooted in a deep understanding of these fields and showcase a commanding ability to re-conceptualize long-held theories and assumptions in corporate finance through the lens of behavioral economics. He brings enormous depth of understanding to develop arguments that will leave a lasting mark on how we think about corporate finance, investment strategy, and the role of finance in the economy.” (Yesha Yadav, Associate Professor of Law, Vanderbilt University Law School, USA)

“Chen describes important advances in our understanding of markets and behavior. This book is a comprehensive guideto the 'postmodern' approach to finance.” (José-María Montero Lorenzo, Professor of Statistics, University of Castille-La Mancha, Spain)

“Behavioral finance may not be the “mainstream” asset pricing theory taught and researched, but it has been embraced for decades by financial professionals. Chen provides not only a comprehensive discussion on the risk aversion phenomena observed in markets, but also suggests an innovative approach for understanding and measuring its components.” (Merav Ozair, Assistant Professor of Finance Risk Engineering, New York University, USA)