Optimal strategies under worst-case scenarios have been studied in Bernard et al.
[2013a]. Bernard et al. utilize copulas to construct cost-efficient strategies with a predefined
dependence structure in the tail between the payoff and the market. In their study
they show that such strategies with state-dependent copula constraints dominate traditional
diversification strategies in terms of the provided protection in the states of market
downturns. We derive similar strategies, however using correlation constraints instead of
copula constraints in the tail. We found that for an investor seeking negative dependence
with the market, it is cheaper to construct a strategy with conditional correlation constraint
in the tail. However, the constructed strategies with conditional correlation constraints do
not provide sufficient protection in bad states of the economy. Therefore, when analyzing
a strategy, negative correlation with the market in the tail is not a sufficient indicator for
the protection level in the event of a market crisis.
| Identifer | oai:union.ndltd.org:LACETR/oai:collectionscanada.gc.ca:OWTU.10012/8458 |
| Date | January 2014 |
| Creators | Ringe, Eduard |
| Source Sets | Library and Archives Canada ETDs Repository / Centre d'archives des thèses électroniques de Bibliothèque et Archives Canada |
| Language | English |
| Detected Language | English |
| Type | Thesis or Dissertation |
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