Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/87031
Authors: 
Elkamhia, Redouane
Stefanova, Denitsa
Year of Publication: 
2011
Series/Report no.: 
Tinbergen Institute Discussion Paper 11-028/2/DSF10
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.
Subjects: 
correlation hedging
dynamic portfolio allocation
Monte Carlo simulation
tail dependence
JEL: 
C15
C16
C51
G11
Document Type: 
Working Paper

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