Higher Order Comoments and Dependence Structure of Equity Portfolio

43 Pages Posted: 30 Jun 2014

See all articles by Mario Cerrato

Mario Cerrato

London Metropolitan University - Department of Economics, Finance and International Business (EFIB)

John Crosby

University of Maryland - Robert H. Smith School of Business

Minjoo Kim

University of Liverpool - Accounting and Finance Division

Yang Zhao

Central University of Finance and Economics (CUFE) - Chinese Academy of Finance and Development

Date Written: September 25, 2015

Abstract

We study a relation between higher order comoments and dependence structure of equity portfolio in the US and UK by relying on a simple portfolio approach where equity portfolios are sorted on the higher order comoments. We find that beta and coskewness are positively related with a copula correlation, whereas cokurtosis is negatively related with it. We also find that beta positively associates with an asymmetric tail dependence whilst coskewness negatively associates with it. Furthermore, two extreme equity portfolios sorted on the higher order comments are closely correlated and their dependence structure is strongly time-varying and nonlinear. Backtesting results of value-at-risk and expected shortfall demonstrate the importance of modeling a dynamic and asymmetric dependence in the risk management.

Keywords: Higher Order Comoments, Dependence Structure, Hyperbolic Generalized Skewed t Copula, Generalized Autoregressive Score, Risk Management

JEL Classification: C53, G17

Suggested Citation

Cerrato, Mario and Crosby, John and Kim, Minjoo and Zhao, Yang, Higher Order Comoments and Dependence Structure of Equity Portfolio (September 25, 2015). Available at SSRN: https://ssrn.com/abstract=2654002 or http://dx.doi.org/10.2139/ssrn.2460168

Mario Cerrato

London Metropolitan University - Department of Economics, Finance and International Business (EFIB) ( email )

Economics Subject Group, LMBS
London EC2M 6SQ, EC2M 6SQ
United Kingdom

John Crosby

University of Maryland - Robert H. Smith School of Business ( email )

College Park, MD 20742-1815
United States
+447979901892 (Phone)

HOME PAGE: http://www.john-crosby.co.uk/

Minjoo Kim

University of Liverpool - Accounting and Finance Division ( email )

227 Grove
Management School
Liverpool, Liverpool L69 3BX
United Kingdom

HOME PAGE: http://https://www.liverpool.ac.uk/management/staff/minjoo-kim/

Yang Zhao (Contact Author)

Central University of Finance and Economics (CUFE) - Chinese Academy of Finance and Development ( email )

39 South College Road
Beijing
China

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