2008-03-01
Increasing correlations or just fat tails?
Publication
Publication
Journal of Empirical Finance , Volume 15 - Issue 2 p. 287- 309
Increasing correlation during turbulent market conditions implies a reduction in portfolio diversification benefits. We investigate the robustness of recent empirical results that indicate a breakdown in the correlation structure by deriving theoretical truncated and exceedance correlations using alternative distributional assumptions. Analytical results show that the increase in conditional correlation could be a result of assuming conditional normality for the return distribution. When assuming a popular alternative distribution – the bivariate Student-tr – we find significantly less support for an increase in conditional correlation and conclude that this is due to the presence of fat tails when assuming normality in the return distribution.
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doi.org/10.1016/j.jempfin.2007.01.001, hdl.handle.net/1765/13885 | |
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Journal of Empirical Finance | |
Organisation | Erasmus Research Institute of Management |
Campbell-Pownall, R., Forbes, C., Koedijk, K., & Kofman, P. (2008). Increasing correlations or just fat tails?. Journal of Empirical Finance, 15(2), 287–309. doi:10.1016/j.jempfin.2007.01.001 |