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Changing Correlation and Equity Portfolio Diversification Failure for Linear Factor Models during Market Declines

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  • Alessio Sancetta
  • Steve E. Satchell

Abstract

The paper considers a linear factor model (LFM) to study the behaviour of the correlation coefficient between various stock returns during a downturn. Changing correlation is related to the tail distribution of the driving factors, which is the market for Sharpe's one-factor model. General classes of distribution functions are considered and asymptotic conditions found on the tails of the distribution, which determine whether diversification will succeed or fail during a market decline.

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Bibliographic Info

Article provided by Taylor & Francis Journals in its journal Applied Mathematical Finance.

Volume (Year): 14 (2007)
Issue (Month): 3 ()
Pages: 227-242

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Handle: RePEc:taf:apmtfi:v:14:y:2007:i:3:p:227-242

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Related research

Keywords: Asymptotic Expansion; Factor Model; Portfolio Diversification; Truncated Variance;

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Cited by:
  1. Dominik Wied & Matthias Arnold & Nicolai Bissantz & Daniel Ziggel, 2013. "Über die Anwendbarkeit eines neuen Fluktuationstests für Korrelationen auf Finanzzeitreihen," AStA Wirtschafts- und Sozialstatistisches Archiv, Springer, vol. 6(3), pages 87-103, March.
  2. Peter Christoffersen & Hugues Langlois, 2011. "The Joint Dynamics of Equity Market Factors," CREATES Research Papers 2011-45, School of Economics and Management, University of Aarhus.

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