A0300
Title: Systemic risk detection using entropy approach in portfolio selection strategy
Authors: David Nedela - VSB - TU Ostrava (Czech Republic) [presenting]
Tomas Tichy - VSB-TU Ostrava (Czech Republic)
Gabriele Torri - University of Bergamo (Italy)
Abstract: The focus is on the investigation of systemic risk in portfolio management. Such a kind of risk significantly affects, among other issues, the behaviour of financial markets and the banking sector. Thus, the concept of an early warning system is presented by employing different entropy measures to detect the occurrence of systemic risk. Generally, early warning systems of systemic risk are useful tools for macro-prudential regulators. Furthermore, these tools facilitate an efficient decision-making process and simultaneously increase the financial stability of portfolio managers by reducing exposure to systemic risk. For this reason, a portfolio selection strategy is designed with a dual emphasis on systemic risk. In order to determine the optimal composition of a portfolio, a new double optimization strategy is used. Specifically, this strategy consists of the maximization of selected performance ratios in the first step and the minimization of selected systemic risk indicators (CoVaR, marginal expected shortfall) for a given expected return in the second step. Essentially, by applying this strategy, the total risk of the portfolio is reduced and its profitability is improved. Reducing investment risk is emphasised leads to the overall stability of the financial system.
