Template-Type: ReDIF-Paper 1.0
Series: Tinbergen Institute Discussion Papers
Creation-Date: 2011-02-11
Number: 11-028/2/DSF10
Author-Name: Redouane Elkamhia
Author-Workplace-Name: University of Iowa, Henry B. Tippie College of Business
Author-Name: Denitsa Stefanova
Author-Workplace-Name: VU University Amsterdam, and Duisenberg School of Finance
Title: Dynamic Correlation or Tail Dependence Hedging for Portfolio Selection
Abstract: 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.
Classification-JEL: C15, C16, C51, G11
Keywords: correlation hedging, dynamic portfolio allocation, Monte Carlo simulation, tail dependence
File-Url: https://papers.tinbergen.nl/11028.pdf
File-Format: application/pdf
File-Size: 1407049 bytes
Handle: RePEc:tin:wpaper:20110028