Mind the tails

Abstract

Extremes have been gaining importance over time. This dissertation studies the impact of country’s tail dependence directly in asset allocation. We propose a new measure of country’s extreme dependence aggregating sector information. We use this new variable as a new characteristic in the asset allocation following Brandt and Santa-Clara (2006). The left tail dependence has a larger importance than the right tail, which corroborates findings from previous authors. We show that our OOS Sharpe ratios are of the order of 0.50 for the last two decades, twice as much as Brandt and Santa-Clara (2006). This outperformance is mostly prevalent during crisis periods. The results are robust to different levels of risk aversion.

Date of Award	31 Aug 2012
Original language	English
Awarding Institution	Universidade Católica Portuguesa
Supervisor	José Faias (Supervisor)