Changing Correlation and Equity Portfolio Diversification Failure for Linear Factor Models during Market Declines
AbstractThe 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 InfoArticle provided by Taylor & Francis Journals in its journal Applied Mathematical Finance.
Volume (Year): 14 (2007)
Issue (Month): 3 ()
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- 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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