Limits of Diversification under Fat Tails and Dependence

Rustam Ibragimov and Artem Prokhorov

Chapter 4 in Heavy Tails and Copulas:Topics in Dependence Modelling in Economics and Finance, 2017, pp 113-170 from World Scientific Publishing Co. Pte. Ltd.

Abstract: This chapter revisits the question of when portfolio diversification does and does not work raised in Chapter 2. What is different is that now we let the portfolio components have certain more or less arbitrary forms of dependence. The types of dependence we consider include general power-type copula families, including those discussed in Section 3.3, as well as dependence structures induced by convolutions of α-symmetric distributions and models with common multiplicative and additive shocks.

Keywords: Heavy-Tailed Distribution; Copulas; Tail Dependence; Majorization Theory; Financial Contagion; Crises (search for similar items in EconPapers)
Date: 2017
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