Relation between higher order comoments and dependence structure of equity portfolio

Cerrato, M. , Crosby, J., Kim, M. and Zhao, Y. (2017) Relation between higher order comoments and dependence structure of equity portfolio. Journal of Empirical Finance, 40, pp. 101-120. (doi: 10.1016/j.jempfin.2016.11.007)

Abstract

We study a relation between higher order comoments and dependence structure of equity portfolio in the US and UK by relying on a simple portfolio approach where equity portfolios are sorted on the higher order comoments. We find that beta and coskewness are positively related with a copula correlation, whereas cokurtosis is negatively related with it. We also find that beta positively associates with an asymmetric tail dependence whilst coskewness negatively associates with it. Furthermore, two extreme equity portfolios sorted on the higher order comoments are closely correlated and their dependence structure is strongly time varying and nonlinear. Backtesting results of value-at-risk and expected shortfall demonstrate the importance of dynamic modeling of asymmetric tail dependence in the risk management of extreme events.

• Item Type: Articles
• Status: Published
• Refereed: Yes
• Glasgow Author(s) Enlighten ID: Cerrato, Professor Mario and Kim, Dr Minjoo
• Authors: Cerrato, M., Crosby, J., Kim, M., and Zhao, Y.
• Subjects: H Social Sciences > HG Finance
• College/School: College of Social Sciences > Adam Smith Business School > Economics
• Journal Name: Journal of Empirical Finance
• Publisher: Elsevier
• ISSN: 0927-5398
• ISSN (Online): 1879-1727
• Published Online: 24 November 2016
• Copyright Holders: Copyright © 2016 Elsevier B.V.
• First Published: First published in Journal of Empirical Finance 40:101-120
• Publisher Policy: Reproduced in accordance with the publisher copyright policy