Using Four-Moment Tail Risk to Examine Financial and Commodity Instrument Diversification
University of Alaska Anchorage
Robert T. Daigler
Florida International University (FIU) - Department of Finance
Financial Review, Vol. 45, Issue 4, pp. 1101-1123, November 2010
We consider the effect of higher moments on diversification, since most assets possess a potential for tail losses. In particular, we examine higher-moment Value-at-Risk measures for individual instruments and diversified portfolios. We find that a naïve futures portfolio is consistently superior to common stock indexes. As few as ten randomly chosen instruments diversify away 85% of the unsystematic four-moment tail risk. We also compare the two- and four-moment tail risks for different size portfolios. Finally, the tail risk for naïve portfolios varies much less over time than other portfolios.
Number of Pages in PDF File: 23Accepted Paper Series
Date posted: October 13, 2010
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