Portfolio Risk Management Using Six Sigma Quality Principles

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The conventional approach to portfolio risk management has been value-at-risk (VaR), but the financial crisis of 2008 revealed the weaknesses of the VaR model. In this paper, the authors discuss the underlying deficiencies of the VaR model when applied to asset returns. Since the financial crisis, new methods to provide more effective portfolio risk management are being sought. Most of these involve more complex quantitative models to better deal with tail riskand other deficiencies of the VaR model. The authors instead propose an approach with years of success in operational applications, the Six Sigma quality methodology. They show how the basic philosophy of Six Sigma is applicable to portfolio risk management, both theoretically and with an empirical demonstration. The authors then describe how a risk management system for investment portfolios can be built using Six Sigma methods.
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Barbara Peck
Barbara Peck
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Date Added: Nov 2, 2021
Category: Resources
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