Diversification Meltdown or the Impact of Fat tails on Conditional Correlation?

A perceived increase in correlation during turbulent market conditions implies a reduction in the benefits arising from portfolio diversification. Unfortunately, it is exactly then that these benefits are most needed. To determine whether diversification truly breaks down, we investigate the robustness of a popular conditional correlation estimator against alternative distributional assumptions. Analytical results show that the apparent meltdown in the benefits from diversification could be a consequence of assuming normally distributed returns. A more realistic assumption - the bivariate Student-t distribution - suggests that constant correlation may be sustained over the full support of the multivariate return distributionConditional correlation, Truncated correlation, Bivariate Student-t correlation.

Diversification Meltdown or the Impact of Fat Tails on Conditional Correlation?

A perceived increase in correlation during turbulent market conditions implies a reduction in the benefits arising from portfolio diversification. Unfortunately, it is exactly then that these benefits are most needed. To determine whether diversification truly breaks down, we investigate the robustness of a popular conditional correlation estimator against alternative distributional assumptions. Analytical results show that the apparent meltdown in diversification could be a result of assuming normally distributed returns. A more realistic assumption - the bivariate Student-t distribution - suggests that there is little empirical support for diversification meltdown

Pitfalls and Opportunities in the Use of Extreme Value Theory in Risk Management

Recent literature has trumpeted the claim that extreme value theory (EVT) holds promise for accurate estimation of extreme quantiles and tail probabilities of financial asset returns, and hence hold promise for advances in the management of extreme financial risks. Our view, based on a disinterested assessment of EVT from the vantage point of financial risk management, is that the recent optimism is partly appropriate but also partly exaggerated, and that at any rate much of the potential of EVT remains latent. We substantiate this claim by sketching a number of pitfalls associate with use of EVT techniques. More constructively, we show how certain of the pitfalls can be avoided, and we sketch a number of explicit research directions that will help the potential of EVT to be realized

Gericht op het belangrijkste nieuws: De politiek-sociale betekenis van radionieuws

De historiografie van radio is bezig met een inhaalmanoeuvre. Tot nu toe zijn de politieke aspecten van de omroepgeschiedenis verhoudingsgewijs het best aan bod gekomen. De laatste jaren is regelmatig een pleidooi te horen voor een sociale geschiedenis van de omroep. Paul Koedijk beantwoordt aan die vraag en verkent de politiek-sociale geschiedenis van het radionieuws. Hoe populair is de 'radionieuwsdienst van het ANP' in de loop der jaren geweest? Hoe vrij - ofniet-vrij - bleef het van politieke invloed? En hoe overleefde het radionieuws de komst van de televisie? ---A 'big jukebox' or a 'higher-reaching programme'? The political battle over a third radio broadcaster.The 'Hilversum 3' broadcaster has always played a conciliatory role in public broadcasting - even before it existed. Plans for a third broadcaster became a major playing piece in the broadcasting game. Vahl's research on the genesis of Hilversum 3 sheds light on how this game was played, and offers insight into how Dutch radio tried in vain to cling to essentially obsolete ideals. In the eyes of public radio (het Gooi), Hilversum 3 may have been nothing more than a clumsy attempt to win back some listeners, but to politicians in The Hague it was much more. The political battle that ensued was readily apparent in the final result: a 'popular' radio broadcaster

Increased Correlation in Bear markets: A Downside Risk Perspective

A number of studies have provided evidence of increased correlation in global financial market returns during bear markets. Others, however, have shown that some of this evidence may have been biased. We derive an alternative estimator for implied correlation based on portfolio downside risk measures that does not suffer from this bias. These unbiased quantile correlation estimates are directly applicable to portfolio optimization and to risk management techniques in general. This simple and practical approach captures the increasing correlation in extreme market conditions while providing a pragmatic approach to understanding correlation structure in multivariate return distributions. Based on data for international equity markets we find evidence of significant increased correlation in extreme returns in international equity markets. This proves the importance of providing a tail adjusted mean-variance covariance matrix.correlation; downside risk; extreme returns; international equity markets

Increasing correlations or just fat tails?

Increasing correlation during turbulent market conditions implies a reduction in portfolio diversification benefits. We investigate the robustness of recent empirical results that indicate a breakdown in the correlation structure by deriving theoretical truncated and exceedance correlations using alternative distributional assumptions. Analytical results show that the increase in conditional correlation could be a result of assuming conditional normality for the return distribution. When assuming a popular alternative distribution - the bivariate Student-tr - we find significantly less support for an increase in conditional correlation and conclude that this is due to the presence of fat tails when assuming normality in the return distribution.