Changing Correlation and Equity Portfolio Diversification Failure for Linear Factor Models during Market Declines*

Alessio Sancetta and Steve E. Satchell

Applied Mathematical Finance, 2007, vol. 14, issue 3, pages 227-242

Abstract: The paper considers a linear factor model (LFM) to study the behaviour of the correlation coefficient between various stock returns during a downturn. Changing correlation is related to the tail distribution of the driving factors, which is the market for Sharpe's one-factor model. General classes of distribution functions are considered and asymptotic conditions found on the tails of the distribution, which determine whether diversification will succeed or fail during a market decline.

Keywords: Asymptotic Expansion; Factor Model; Portfolio Diversification; Truncated Variance (search for similar items in EconPapers)
Date: 2007
References: Add references at CitEc
Citations View citations in EconPapers (1) Track citations by RSS feed

Downloads: (external link)
http://www.tandfonline.com/doi/abs/10.1080/13504860600858279 (text/html)
Access to full text is restricted to subscribers.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: http://EconPapers.repec.org/RePEc:taf:apmtfi:v:14:y:2007:i:3:p:227-242

Ordering information: This journal article can be ordered from
http://www.tandf.co.uk/journals/subscription.asp

Access Statistics for this article

Applied Mathematical Finance is edited by Ben Hambly and William Shaw

More articles in Applied Mathematical Finance from Taylor and Francis Journals
Series data maintained by Michael McNulty ().