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Dynamic tail dependence clustering of financial time series

Author

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  • Giovanni De Luca

    (University of Naples Parthenope)

  • Paola Zuccolotto

    (University of Brescia)

Abstract

In this paper we propose a dynamic clustering procedure for time series returns, aimed at providing a criterion for portfolio selection during financial crisis periods focusing attention on the lower tails of the returns distributions. In particular, for each pair of returns a time-varying distribution function is estimated using a copula function; as a result, the coefficient measuring the lower tail dependence is also time-varying with dynamics based on past market volatility. In this way we model the possible contagion between stocks when volatility increases. Accordingly, the clustering procedure based on the lower tail dependence coefficients provides different aggregations ad each time t. The clustering solutions are used to build optimal minimum Conditional Value-at-Risk portfolios able to outperform classical strategies.

Suggested Citation

  • Giovanni De Luca & Paola Zuccolotto, 2017. "Dynamic tail dependence clustering of financial time series," Statistical Papers, Springer, vol. 58(3), pages 641-657, September.
    • Handle: RePEc:spr:stpapr:v:58:y:2017:i:3:d:10.1007_s00362-015-0718-7
    DOI: 10.1007/s00362-015-0718-7
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. F. Marta L. Di Lascio & Andrea Menapace & Roberta Pappadà, 2024. "A spatially‐weighted AMH copula‐based dissimilarity measure for clustering variables: An application to urban thermal efficiency," Environmetrics, John Wiley & Sons, Ltd., vol. 35(1), February.
    2. Luis Lorenzo & Javier Arroyo, 2023. "Online risk-based portfolio allocation on subsets of crypto assets applying a prototype-based clustering algorithm," Financial Innovation, Springer;Southwestern University of Finance and Economics, vol. 9(1), pages 1-40, December.
    3. Fuchs, Sebastian & Di Lascio, F. Marta L. & Durante, Fabrizio, 2021. "Dissimilarity functions for rank-invariant hierarchical clustering of continuous variables," Computational Statistics & Data Analysis, Elsevier, vol. 159(C).
    4. Shulin Zhang & Qian M. Zhou & Huazhen Lin, 2021. "Goodness-of-fit test of copula functions for semi-parametric univariate time series models," Statistical Papers, Springer, vol. 62(4), pages 1697-1721, August.
    5. B. Lafuente-Rego & P. D’Urso & J. A. Vilar, 2020. "Robust fuzzy clustering based on quantile autocovariances," Statistical Papers, Springer, vol. 61(6), pages 2393-2448, December.
    6. F. Marta L. Di Lascio & Andrea Menapace & Roberta Pappadà, 2021. "A spatially-weighted AMH copula-based dissimilarity measure to cluster variables in panel data," BEMPS - Bozen Economics & Management Paper Series BEMPS89, Faculty of Economics and Management at the Free University of Bozen.
    7. Han Yang & Ming-hui Wang & Nan-jing Huang, 2021. "The $$\alpha$$ α -Tail Distance with an Application to Portfolio Optimization Under Different Market Conditions," Computational Economics, Springer;Society for Computational Economics, vol. 58(4), pages 1195-1224, December.
    8. Ji-Eun Choi & Dong Wan Shin, 2022. "Quantile correlation coefficient: a new tail dependence measure," Statistical Papers, Springer, vol. 63(4), pages 1075-1104, August.

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