Title: Impact of trading rules in portfolio process with respect to market risk capital requirement
Authors: David Nedela - VSB - TU Ostrava (Czech Republic) [presenting]
Abstract: A permissible investment approach combines a general portfolio model with other disciplines in the financial area to find a suitable portfolio strategy for investment. The aim is to examine the impact of several trading rules including technical analysis and stochastic dominance approaches in the portfolio creation process in US and UK markets during different time horizons, capturing different market conditions. The analysis is mainly focused on the needs of market risk capital requirement based on the Basel III approach. We consider two strategies for implementing trading rules in the portfolio creation process. Strategy 1 is based on eliminating the whole market systemic risk, represented by the proportion of assets that meet certain trading rules with the alternative investment in a risk-free asset. The second strategy is focused on the use of pure assets that meet specific trading rules. From the results, using strategy 1 to find systemic risk during the crisis reduces the riskiness of the portfolio and capital requirement with a similar level of profitability, whilst strategy 2 generates only slightly higher profit. In a period with a growing economy, strategy 2 is more profitable, but the required positive effect on the level of a capital requirement is not achieved.