Hedging Extreme Co-Movements

Details Hedging Extreme Co-Movements Hedging Extreme Co-Movements

2002-05-30

arxiv.org/abs/cond-mat/0205636v1

Minimizing Extremes, RISK, November issue, 129-133 (2002) (www.risk.net)

Physics

Condensed Matter

Statistical Mechanics

11 pages including 3 figures

Scientific paper

Based on a recent theorem due to the authors, it is shown how the extreme
tail dependence between an asset and a factor or index or between two assets
can be easily calibrated. Portfolios constructed with stocks with minimal tail
dependence with the market exhibit a remarkable degree of decorrelation with
the market at no cost in terms of performance measured by the Sharpe ratio.

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