The Price of Asymmetric Dependence

Abstract

We examine the relative importance of asymmetric dependence (AD) and systematic risk in the cross-section of US equities. Using a β-invariant AD metric, we demonstrate a lower-tail dependence premium that is only 35% of the market risk premium, compared with an upper-tail dependence discount that is 41% of the market risk premium. Lower tail dependence displays a constant price between 1989-2009. Subsequently, we find that return changes in US equities between 2007-2009 reflected changes in systematic risk and upper-tail dependence. This suggests that both systematic risk and AD should be managed in order to reduce the return impact of market downturns.

Copula-Based Divergence Measures for Dependence Between Random Vectors

“…This phenomenon is known as asymmetric dependence, see e.g. Alcock and Satchell (2018). Closely related is the concept of financial contagion, e.g.…”