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Using Four-Moment Tail Risk to Examine Financial and Commodity Instrument Diversification

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  • Leyuan You
  • Robert T. Daigler
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    Abstract

    We consider the effect of higher moments on diversification, since most assets possess a potential for tail losses. In particular, we examine higher-moment Value-at-Risk measures for individual instruments and diversified portfolios. We find that a naïve futures portfolio is consistently superior to common stock indexes. As few as ten randomly chosen instruments diversify away 85% of the unsystematic four-moment tail risk. We also compare the two- and four-moment tail risks for different size portfolios. Finally, the tail risk for naïve portfolios varies much less over time than other portfolios. Copyright (c) 2010, The Eastern Finance Association.

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    Bibliographic Info

    Article provided by Eastern Finance Association in its journal Financial Review.

    Volume (Year): 45 (2010)
    Issue (Month): 4 (November)
    Pages: 1101-1123

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    Handle: RePEc:bla:finrev:v:45:y:2010:i:4:p:1101-1123

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    Web page: http://www.easternfinance.org/
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    Cited by:
    1. Daskalaki, Charoula & Skiadopoulos, George, 2011. "Should investors include commodities in their portfolios after all? New evidence," Journal of Banking & Finance, Elsevier, vol. 35(10), pages 2606-2626, October.
    2. Chin Man Chui & Jian Yang, 2012. "Extreme Correlation of Stock and Bond Futures Markets: International Evidence," The Financial Review, Eastern Finance Association, vol. 47(3), pages 565-587, 08.
    3. Desmoulins-Lebeault, François & Kharoubi-Rakotomalala, Cécile, 2012. "Non-Gaussian diversification: When size matters," Journal of Banking & Finance, Elsevier, vol. 36(7), pages 1987-1996.

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