The Value of Managing Asymmetry Risk in a Portfolio of International Equity Indices

Abstract:     
We explore the benefits gained by actively managing asymmetric dependence during the portfolio construction process. First, we determine the existing and nature of asymmetric dependency between international equity indices. Next, we illustrate how managing lower tail dependence between long/short and long only portfolio's results in a reduction in downside return movements with little expense to upside changes. We also find an accompanying reduction in the variability in returns over time. Finally, managing asymmetric dependency yields reduced changes in asset weights providing for reduced portfolio turnover as well as lower transaction costs and taxes which are often tied to the buying and selling of assets.

Keywords: Portfolio selection, Asymmetric dependence, Lower Tail Dependence, Copula functions, Conditional Value-at-Risk

Working Paper Series