Optimal capital allocation: VaR, CVaR, spectral measures and beyond in Russian Market

1. Optimal capital allocation: VaR, CVaR, spectral measures and beyond in Russian Market A discussion by Branko Urošević Faculty of Economics, University of Belgrade and NBS

2. What is the paper about • This paper aims to compare and contrasts capital allocation based on the standard Markowitz mean-variance efficient frontier with optimal portfolios based on other risk measures: mean-VaR,mean-CVaR and mean-generalized SRM • It aims to do so for a portfolio of 25 most liquid stocks on the Russian stock exchange. • In the process, the paper address a plethora of estimation issues including various volatility forecasting techniques etc, calibrated to the Russian market

3. Claimed contribution • First large portfolio analysis with data from the Russian stock market (whatever that means) • First large-scale comparison of the above methods of optimization that include data from the current financial crisis • They plan to check whether Russian ban on short selling had a desired effect during the crisis time (2008-2009)

4. General remarks • Power point presentation I have received contains carefully outlined summary of the idea and the basic concepts. • It is, however, much more a lecture note than a presentation of the original work (at this iteration). • Given that there is no paper yet, it is hard to make a definitive judgment on the project. However:

5. General comments • The way it is presented, it seems that the authors are simply implementing well known capital allocation methods in the context of the Russian market. • To make the paper (once it is actually written) possible to publish, it is important to focus it on the most salient new results. • These would be, as I understood it, two: • Which capital allocation method performs the best in times of financial crisis • Whether ban on short selling is indeed reducing risk to which investors are exposed

6. Other comments • Use of too many methods for volatility estimation distracts from these two main points. • When writing the paper, the authors should probably go over the exposition of the models relatively quickly (since these are not the original contributions) and focus on the empirical testing instead. • One possibility to broaden the appeal of the paper is to consider a broader class of markets (say, several emerging markets or perhaps also other, developed, markets) and check, overall, which of the methods provides a superior investment performance in times of crisis. That, in itself, would, possibly, make for an interesting paper • If the large scale portfolio is important somehow, this should then be discussed clearly. I.e. perhaps some of the methods may work better in small and other in large scale

7. In conclusion • I enjoyed reading the slides and I learned some interesting things about SRMs. • I think that there is a potential to make this into an interesting paper, but needs a clear focus.