A safety-first investor maximizes expected return subject to a downside risk constraint. Arzac and Bawa [Arzac, E.R., Bawa, V.S., 1977. Portfolio choice and equilibrium in capital markets with safety-first investors. Journal of Financial Economics 4, 277–288.] use the Value at Risk as the downside risk measure. The paper by Gourieroux, Laurent and Scaillet estimates the optimal safety-first portfolio by a kernel-based method, we exploit the fact that returns are fat-tailed, and propose a semi-parametric method for modeling tail events. We also analyze a portfolio containing the two stocks used by Gourieroux et al. and discuss the merits of the safety-first approach.

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doi.org/10.1016/S0927-5398(00)00016-5, hdl.handle.net/1765/12391
Journal of Empirical Finance
Erasmus School of Economics

Jansen, D.W, Koedijk, C.G, & de Vries, C.G. (2000). Portfolio selection with limited downside risk. Journal of Empirical Finance, 247–269. doi:10.1016/S0927-5398(00)00016-5