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Portfolio selection: An extreme value approach

  • DiTraglia, Francis J.
  • Gerlach, Jeffrey R.

We show theoretically that lower tail dependence (χ), a measure of the probability that a portfolio will suffer large losses given that the market does, contains important information for risk-averse investors. We then estimate χ for a sample of DJIA stocks and show that it differs systematically from other risk measures including variance, semi-variance, skewness, kurtosis, beta, and coskewness. In out-of-sample tests, portfolios constructed to have low values of χ outperform the market index, the mean return of the stocks in our sample, and portfolios with high values of χ. Our results indicate that χ is conceptually important for risk-averse investors, differs substantially from other risk measures, and provides useful information for portfolio selection.

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Article provided by Elsevier in its journal Journal of Banking & Finance.

Volume (Year): 37 (2013)
Issue (Month): 2 ()
Pages: 305-323

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Handle: RePEc:eee:jbfina:v:37:y:2013:i:2:p:305-323
Contact details of provider: Web page: http://www.elsevier.com/locate/jbf

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