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Dependence structure of risk factors and diversification effects

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  • Zhou, Chen

Abstract

In this paper, we study the aggregated risk from dependent risk factors under the multivariate Extreme Value Theory (EVT) framework. We consider the heavy-tailedness of the risk factors as well as the non-parametric tail dependence structure. This allows a large range of models on the dependence. We assess the Value-at-Risk of a diversified portfolio constructed from dependent risk factors. Moreover, we examine the diversification effects under this setup.

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Bibliographic Info

Article provided by Elsevier in its journal Insurance: Mathematics and Economics.

Volume (Year): 46 (2010)
Issue (Month): 3 (June)
Pages: 531-540

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Handle: RePEc:eee:insuma:v:46:y:2010:i:3:p:531-540

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Web page: http://www.elsevier.com/locate/inca/505554

Related research

Keywords: Aggregated risk Diversification effect Multivariate extreme value theory;

References

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  5. Susmel, Raul, 2001. "Extreme observations and diversification in Latin American emerging equity markets," Journal of International Money and Finance, Elsevier, Elsevier, vol. 20(7), pages 971-986, December.
  6. Ser-Huang Poon, 2004. "Extreme Value Dependence in Financial Markets: Diagnostics, Models, and Financial Implications," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 17(2), pages 581-610.
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Citations

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Cited by:
  1. Chollete, Loran & de la Pena , Victor & Lu, Ching-Chih, 2009. "International Diversification: An Extreme Value Approach," UiS Working Papers in Economics and Finance, University of Stavanger 2009/26, University of Stavanger.
  2. Kyle Moore & Pengfei Sun & Casper de Vries & Chen Zhou, 2013. "Shape Homogeneity and Scale Heterogeneity of Downside Tail Risk," Working Papers, Chapman University, Economic Science Institute 13-13, Chapman University, Economic Science Institute.
  3. Maarten van Oordt & Chen Zhou, 2011. "Systematic risk under extremely adverse market condition," DNB Working Papers, Netherlands Central Bank, Research Department 281, Netherlands Central Bank, Research Department.
  4. Alex Ferrer & José Casals & Sonia Sotoca, 2014. "Linking the problems of estimating and allocating unconditional capital," Documentos de Trabajo del ICAE, Universidad Complutense de Madrid, Facultad de Ciencias Económicas y Empresariales, Instituto Complutense de Análisis Económico 2014-13, Universidad Complutense de Madrid, Facultad de Ciencias Económicas y Empresariales, Instituto Complutense de Análisis Económico.
  5. Gatzert, Nadine & Kellner, Ralf, 2011. "The influence of non-linear dependencies on the basis risk of industry loss warranties," Insurance: Mathematics and Economics, Elsevier, Elsevier, vol. 49(1), pages 132-144, July.
  6. Kellner, Ralf & Gatzert, Nadine, 2013. "Estimating the basis risk of index-linked hedging strategies using multivariate extreme value theory," Journal of Banking & Finance, Elsevier, Elsevier, vol. 37(11), pages 4353-4367.
  7. Moore, Kyle & Sun, Pengei & de Vries, Casper G. & Zhou, Chen, 2013. "The drivers of downside equity tail risk," MPRA Paper 45591, University Library of Munich, Germany.
  8. Zhou, Chen, 2013. "The impact of imposing capital requirements on systemic risk," Journal of Financial Stability, Elsevier, Elsevier, vol. 9(3), pages 320-329.
  9. Marco Rocco, 2011. "Extreme value theory for finance: a survey," Questioni di Economia e Finanza (Occasional Papers), Bank of Italy, Economic Research and International Relations Area 99, Bank of Italy, Economic Research and International Relations Area.
  10. Moore, Kyle & Sun, Pengfei & de Vries, Casper G. & Zhou, Chen, 2013. "The cross-section of tail risks in stock returns," MPRA Paper 45592, University Library of Munich, Germany.
  11. Tong, Bin & Wu, Chongfeng & Xu, Weidong, 2012. "Risk concentration of aggregated dependent risks: The second-order properties," Insurance: Mathematics and Economics, Elsevier, Elsevier, vol. 50(1), pages 139-149.

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