Portfolio construction incorporating asymmetric dependence structures: a user's guide

Hatherley, Anthony; Alcock, Jamie

doi:10.1111/j.1467-629x.2007.00219.x

Cited by 33 publications

(15 citation statements)

References 54 publications

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“…Research efforts in stocks already present promising results. Hatherley and Alcock (2007) and Alcock and Hatherley (2009) develop a general methodology that can be used to determine the robustness of mean-variance-based portfolio theory to nonnormal assumptions, focusing particularly on the effects of the assumption of asymmetric dependence. They demonstrate that for both portfolios of indices and for individual stocks, portfolio performance substantially improves by correcting for asymmetric dependence.…”

Section: Resultsmentioning

confidence: 99%

Fundamental Drivers of Dependence in REIT Returns

Alcock

Steiner

2016

J Real Estate Finan Econ

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We analyse the empirical relationships between firm fundamentals and the dependence structure between individual REIT and stock market returns. In contrast to previous studies, we distinguish between the average systematic risk of REITs and their asymmetric risk in the sense of a disproportionate likelihood of joint negative return clusters between REITs and the stock market. We find that REITs with low systematic risk are typically small, with low short-term momentum, low turnover, high growth opportunities and strong long-term momentum. Holding systematic risk constant, the main driving forces of asymmetric risk are leverage and, to some extent, short-term momentum. Specifically, we find that leverage has an asymmetric effect on REIT return dependence that outweighs the extent to which it increases the average sensitivity of REIT equity to market fluctuations, explaining the strong negative impact of leverage on firm performance especially during crisis periods that has been documented in recent empirical work.

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Section: Resultsmentioning

confidence: 99%

Fundamental Drivers of Dependence in REIT Returns

Alcock

Steiner

2016

J Real Estate Finan Econ

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“…Copula functions allow us to treat general versions of dependence in a multi‐dimensional model. For the present application, we give a brief overview of the topic (Hatherley and Alcock, 2007 also provide a useful overview). A comprehensive treatment of copulas is given by Joe (1997) and Nelsen (1999).…”

Section: Dependence Modellingmentioning

confidence: 99%

“…, 2003; Junker et al. , 2006; Hatherley and Alcock, 2007). Other approaches, such as non‐parametric copulas and conditional copulas, are explored by Scaillet (2002) and Granger et al.…”

Section: Introductionmentioning

confidence: 99%

The flight‐to‐quality effect: a copula‐based analysis

Durand

Junker²,

Szimayer

2010

Accounting & Finance

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We derive and estimate a copula combining the features of the Frank and Gumbel copulas to analyse the relationship between equity and long-term bond returns. Our analysis of quarterly returns from 1952 to 2003 finds that, in general, there is a positive relationship between equity returns and bond returns. In extreme situations, however, there is approximately a one-in-seven chance of a flight-to-quality effect where large negative equity returns are associated with large positive bond returns. Copyright (c) The Authors. Journal compilation (c) 2009 AFAANZ.

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“…by including asymmetric dependence or tail dependence in the asset allocation decision, see e.g. Hatherley and Alcock (2007). Furthermore, since this study is limited to a bivariate setting, future research should extend the analysis to the multivariate case including various other asset classes next to real estate and equity returns.…”

Section: Resultsmentioning

confidence: 99%

Modelling the Dependence Structure between Australian Equity and Real Estate Markets – a Copula Approach

Rong¹,

Trück²

2015

AABFJ

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Over the last decades, the Australian market for Real Estate Investment Trusts (REITS) has shown substantial growth rates. We apply conditional copula models in order to investigate the dependence structure between the returns from REITS and equity markets in Australia. The dependence between these assets has a significant impact on the diversification potential and risk for a portfolio of multiple assets and is therefore of great interest to portfolio managers and investors. We compare the suggested copula models to a standard variance-covariance approach and a Dynamic Conditional Correlation (DCC) model. We observe significant positive correlations between the considered series. The level of correlation has also increased during the last decade indicating a limited diversification potential of investments in REITS for Australia markets. We also find tail dependence between the examined series that is best modelled by the Student t copula. Finally, we conduct a back-testing Value-at-Risk study for a portfolio that combines investments in real estate and equity. We find that the conditional copula approach outperforms both a static variance-covariance approach and the DCC model with respect to quantifying the risk of extreme negative returns. Our findings suggest that ignoring the complex and dynamic dependence structure in favour of a simple multivariate normal model leads to a significant underestimation of the actual risk.

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Portfolio construction incorporating asymmetric dependence structures: a user's guide

Cited by 33 publications

References 54 publications

Fundamental Drivers of Dependence in REIT Returns

Fundamental Drivers of Dependence in REIT Returns

The flight‐to‐quality effect: a copula‐based analysis

Modelling the Dependence Structure between Australian Equity and Real Estate Markets – a Copula Approach

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