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Authors
Advisor(s)
Abstract(s)
Purpose: This study identifies residual, persistent, or resilient risks that remain even after controls
for systematic and sentiment risk and extensive portfolio diversification are applied.
Method: This methodology employs the Newey-West regression analysis in conjunction with the
Lagrange multiplier method to construct a global minimum variance portfolio. This analysis focuses explicitly on the diversifiable risk component. It uses two benchmarks, the Wilshire 5000
and S&P500, in collaboration with investor sentiment metrics. Its primary objective is to mitigate
systematic and idiosyncratic risk by examining three different portfolios (Tourism, Utilities/Energy, and Industrials) comprising 132 individual stocks observed over a span of 17 years.
Findings: This study identifies a persistent and resilient residual risk that may be connected to
undisclosed uncertainties and emerging risks that are known to exist but are not yet fully
materialized. These include potential ramifications from emerging widespread climate disasters,
the duration of the recession periods, the effect of uncertainty on merger and acquisition outcomes, and even unknown threats such as the proliferation of new computer viruses and system
vulnerabilities, the repercussions of unregulated artificial intelligence, and shifts in individual
preferences, beliefs, and behaviours that may influence both investors and society’s economic
dynamics. All these risks and uncertainties will greatly contribute to a fear of the unknown and
subsequently affect financial markets.
Novelty: In this study, we extract the systematic and investor sentiment risks for individual socks
and construct annual minimum variance portfolios. Our next step was to justify the presence of
unknown, persistent, resilient, or residual risk factors.
Practical implications: This particular approach provides multiple advantages to investors and
regulators. It enables them to construct portfolios with lower levels of risk and proactively
mitigate potential sources of risk that are presently little more than possibilities but may evolve
into real threats.
Description
Keywords
Resilient risk Portfolio diversification Persistent risk Residual risk Systematic and idiosyncratic risk
Citation
Reis, P. N., & Pinto, A. P. S. (2024). Unlocking portfolio resilient and persistent risk: A holistic approach to unveiling potential grounds. The North American Journal of Economics and Finance,73, 102198.
Publisher
Elsevier