How to Reduce Extreme Risk of the US Tourism Indices?- Minimum-CVaR Portfolio Approach

Živkov, Dejan and Kovačević-Berleković, Bojana and Kicović, Dušan and Đurašković, Jasmina (2023) How to Reduce Extreme Risk of the US Tourism Indices?- Minimum-CVaR Portfolio Approach. Finance a úvěr-Czech Journal of Economics and Finance, 73 (1). pp. 81-103. ISSN 0015-1920

Text Živkov, Berleković Kovačević, Kicović, Đurašković - Finance a úvěr-Czech Journal of Economics and Finance, 73(1) 2023.pdf - Published Version Available under License Creative Commons Attribution Non-commercial No Derivatives. Download (1MB)

Abstract

This paper combines two tourism indices from the U.S. with six auxiliary assets in a multivariate portfolio in order to minimize extreme risk of the indices. Extreme risk is measured by the conditional Value-at-Risk metric. We construct the two types of portfolios – one is the minimum-risk portfolio, and the other one has the 50% constraint on the tourism indices. Also, we determine the pre-COVID and COVID subsamples via the modified ICSS algorithm. The results indicate that the tourism indices are mostly removed from the minimum-risk portfolios because they are among the riskiest assets. Because of that, the tourism-dominated portfolios gain greater importance. Gold has the highest share as an auxiliary asset in the tourism-dominated portfolios because gold has relatively low risk, but more importantly, gold has very low pairwise correlation with the tourism indices. In the COVID period, the share of gold increases compared to the preCOVID period, which means that the best hedging abilities of gold comes to the fore in a crisis. High risk of the tourism indices is reduced more than 40% in the tourismdominated portfolios.

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