Dynamic Correlation or Tail Dependence Hedging for Portfolio Selection

Arbeitspapier

We solve for the optimal portfolio allocation in a setting where both conditional correlation and theclustering of extreme events are considered. We demonstrate that there is a substantial welfare loss indisregarding tail dependence, even when dynamic conditional correlation has been accounted for, andvice versa. Both effects have distinct portfolio implications and cannot substitute each other. We alsoisolate the hedging demands due to macroeconomic and market conditions that command importanteconomic gains. Our results are robust to the sample period, the choice of the dependence structure,and both varying levels of average correlation and tail dependence coefficients.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: Tinbergen Institute Discussion Paper ; No. 11-028/2/DSF10

Classification and Topics

• Classification: Wirtschaft ; Statistical Simulation Methods: General ; Model Construction and Estimation ; Portfolio Choice; Investment Decisions
• Subject: correlation hedging ; dynamic portfolio allocation ; Monte Carlo simulation ; tail dependence ; Hedging ; Portfolio-Management ; Statistische Verteilung ; Monte-Carlo-Methode ; Theorie

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Elkamhia, Redouane ; Stefanova, Denitsa
• Event: Veröffentlichung
• (who): Tinbergen Institute
• (where): Amsterdam and Rotterdam
• (when): 2011

Further information

• Handle: http://hdl.handle.net/10419/87031
• Last update: 10.03.2025, 11:43 AM CET