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Background risk models and stepwise portfolio construction. (English) Zbl 1349.62517

Summary: Assuming the multiplicative background risk model, which has been a popular model due to its practical applicability and technical tractability, we develop a general framework for analyzing portfolio performance based on its subportfolios. Since the performance of subportfolios is easier to assess, the herein developed stepwise portfolio construction (SPC) provides a powerful alternative to a number of traditional portfolio construction methods. Within this framework, we discuss a number of multivariate risk models that appear in the actuarial and financial literature. We provide numerical and graphical examples that illustrate the SPC technique and facilitate our understanding of the herein developed general results.

MSC:

62P05 Applications of statistics to actuarial sciences and financial mathematics
91B30 Risk theory, insurance (MSC2010)
91G10 Portfolio theory
44A10 Laplace transform
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