Tail Event Driven Asset Allocation: Evidence from Equity and Mutual Funds Markets

• Main Authors: HARDLE, Wolfgang Karl, LEE, David K. C., NASEKIN, Sergey, NI, Xinwen, PETUKINA, Alla
• Format: text
• Language: English
• Published: Institutional Knowledge at Singapore Management University 2015
• Subjects: adaptive lasso; portfolio optimisation; quantile regression; Value-at-Risk; tail events; Finance and Financial Management; Portfolio and Security Analysis
• Online Access: https://ink.library.smu.edu.sg/lkcsb_research/4868; https://ink.library.smu.edu.sg/context/lkcsb_research/article/5867/viewcontent/TailEventDrivenAssetAllocation_2015.pdf
• Institution: Singapore Management University

The correlation structure across assets and opposite tail movements are essential to the asset allocation problem, since they determine the level of risk in a position. Correlation alone is not informative on the distributional details of the assets. Recently introduced TEDAS -Tail Event Driven ASset allocation approach determines the dependence between assets at tail measures. TEDAS uses adaptive Lasso based quantile regression in order to determine an active set of negative nonzero coefficients. Based on these active risk factors, an adjustment for intertemporal correlation is made. In this research authors aim to develop TEDAS, by introducing three TEDAS modifications differing in allocation weights‘ determination: a Cornish-Fisher Value-at-Risk minimization, Markowitz diversification rule or naive equal weighting. TEDAS strategies significantly outperform other widely used allocation approaches on two asset markets: German equity and Global mutual funds.