PRIX – A risk index for global private investors

Abstract

Purpose The purpose of this paper is to create a universal (asset-class-independent) portfolio risk index for a global private investor. Design/methodology/approach The authors first discuss existing risk measures and desirable properties of a risk index. Then, they construct a universal (asset-class-independent) portfolio risk measure by modifying Financial Turbulence of Kritzman and Li (2010). Finally, the average portfolio of a representative global private investor is determined, and, by applying the new portfolio risk measure, they derive the Private investor Risk IndeX. Findings The authors show that this index exhibits commonly expected properties of risk indices, such as proper reaction to well-known historical market events, persistence in time and forecasting power for both risk and returns to risk. Practical implications A dynamic asset allocation example illustrates one potential practical application for global private investors. Originality/value As of now, a risk index reflecting the overall risk of a typical multi-asset-class portfolio of global private investors does not seem to exist.

Credit intermediation and the transmission of macro-financial uncertainty: International evidence

“…Our methodology is in the spirit of a 'financial turbulence' measure that has been proposed in the finance literature by Kritzman and Li (2010) based on work by Chow et al (1999) to measure portfolio risk. Stöckl et al (2017) and Stöckl and Hanke (2014) highlight its advantages over other commonly used financial risk measures and show how information from various different input factors can be accumulated across variables and regions.…”

“…we follow Stöckl et al (2017) and normalize the weights by their squared sum. Therefore, we define a diagonal matrix of adjusted weights as…”

Revisiting Fama–French’s asset pricing model with an MCB volatility risk factor

“…They focus more on the factor individually rather than in a model in how more liquid stocks tend to see higher returns. Recent studies such as Stockl et al (2017) even propose independent and universal portfolio risk measures such as PRIX.…”