Relation between higher order comoments and dependence structure of equity portfolio

Mario Cerrato, John Crosby, Minjoo Kim () and Yang Zhao

Journal of Empirical Finance, 2017, vol. 40, issue C, 101-120

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.

Keywords: Higher order comoments; Dependence structure; Hyperbolic generalized skewed t copula; Generalized autoregressive score; Risk management (search for similar items in EconPapers)
JEL-codes: C53 G17 (search for similar items in EconPapers)
Date: 2017
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (12)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:empfin:v:40:y:2017:i:c:p:101-120

DOI: 10.1016/j.jempfin.2016.11.007

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