CHAPTER 3
Sensitivity Analysis of
Portfolio Volatility:
Importance of Weights,
Sectors and Impact of
Trading Strategies
Emanuele Borgonovo and Marco Percoco∗
3.1 INTRODUCTION
This chapter discusses the application of a new method to the Sensitivity
Analysis (SA) of portfolio properties and proposes an SA scheme that is
capable of assessing the joint impact of changes in portfolio composition on
portfolio volatility (σp).
Recent years have seen the fast development of models for the estima-
tion of volatility. Studies in this field has moved from both a theoretical
and an empirical need to explain evidence on volatility behavior (for exam-
ple, volatility smile) that is not captured by constant volatility models as the
BlackandScholesone(BlackandScholes, 1973; Duan, 1995; Shephard, 2005).
∗We would like to thank Simone Manganelli for providing us with data and basic MatLab
codes, and participants at EWFM (Brescia, May 2005) for useful comments on an earlier draft.
We also thank Guillermo Baquero for precious comments at the EFMAconference (Milan, 2005).
Financial support from Bocconi University is gratefully acknowledged.
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