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Downside Risk of Derivative Portfolios With Mean-Reverting Underlyings
Social Science Research Network
We carry out a Monte-Carlo simulation of a standard portfolio management strategy involving derivatives, to estimate the sensitivity of its downside risk to a change of mean-reversion of the underlyings. We find that the higher the intensity of mean-reversion, the lower the probability of reaching a pre-determined loss level. This phenomenon appears of large statistical significance for large enough loss levels. We also find that the higher the mean-reversion intensity of the underlyings, thedoi:10.2139/ssrn.1520426 fatcat:ivi6s6jzr5gszdfngjqvmfzdce