The Value of Managing Asymmetry Risk in a Portfolio of International Equity Indices

36 Pages Posted: 18 Sep 2007 Last revised: 7 Apr 2008

See all articles by Jamie Alcock

Jamie Alcock

University of Oxford

Anthony Hatherley

University of Queensland - Business School; Citigroup, Inc. - Citigroup - Sydney

Abstract

We explore the benefits gained by actively managing asymmetric dependence during the portfolio construction process. First, we determine the existing and nature of asymmetric dependency between international equity indices. Next, we illustrate how managing lower tail dependence between long/short and long only portfolio's results in a reduction in downside return movements with little expense to upside changes. We also find an accompanying reduction in the variability in returns over time. Finally, managing asymmetric dependency yields reduced changes in asset weights providing for reduced portfolio turnover as well as lower transaction costs and taxes which are often tied to the buying and selling of assets.

Keywords: Portfolio selection, Asymmetric dependence, Lower Tail Dependence, Copula functions, Conditional Value-at-Risk

Suggested Citation

Alcock, Jamie and Hatherley, Anthony and Hatherley, Anthony, The Value of Managing Asymmetry Risk in a Portfolio of International Equity Indices. Available at SSRN: https://ssrn.com/abstract=1015202 or http://dx.doi.org/10.2139/ssrn.1015202

Jamie Alcock (Contact Author)

University of Oxford ( email )

Mansfield Road
Oxford, Oxfordshire OX1 4AU
United Kingdom

Anthony Hatherley

University of Queensland - Business School ( email )

Brisbane, Queensland 4072
Australia

Citigroup, Inc. - Citigroup - Sydney ( email )

Level 40
Citigroup Centre 2 Park Street
Sydney NSW 2000
Australia

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