Economics at your fingertips  

Portfolio selection: An extreme value approach

Francis DiTraglia and Jeffrey R. Gerlach

Journal of Banking & Finance, 2013, vol. 37, issue 2, 305-323

Abstract: We show theoretically that lower tail dependence (χ), a measure of the probability that a portfolio will suffer large losses given that the market does, contains important information for risk-averse investors. We then estimate χ for a sample of DJIA stocks and show that it differs systematically from other risk measures including variance, semi-variance, skewness, kurtosis, beta, and coskewness. In out-of-sample tests, portfolios constructed to have low values of χ outperform the market index, the mean return of the stocks in our sample, and portfolios with high values of χ. Our results indicate that χ is conceptually important for risk-averse investors, differs substantially from other risk measures, and provides useful information for portfolio selection.

Keywords: Portfolio selection; Extreme value theory; Tail dependence (search for similar items in EconPapers)
JEL-codes: C58 G11 (search for similar items in EconPapers)
Date: 2013
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7) Track citations by RSS feed

Downloads: (external link)
Full text for ScienceDirect subscribers only

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:

Access Statistics for this article

Journal of Banking & Finance is currently edited by Ike Mathur

More articles in Journal of Banking & Finance from Elsevier
Bibliographic data for series maintained by Dana Niculescu ().

Page updated 2019-03-31
Handle: RePEc:eee:jbfina:v:37:y:2013:i:2:p:305-323