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White Papers

How the Risk Measures play important roles for Tail Risk Management and Diversification

In a multi-asset allocation framework that consists of equities and bonds, investors should avoid the tail risk situation, where positive correlation and negative return on both assets occur at the same time. This paper seeks to examine how the risk measures, lower tail-dependence based on copula approach and Conditional Value-at-Risk, affect the portfolio strategies, and play important roles for tail risk management and diversify the portfolios. These strategies showed better performances in comparison with the traditional portfolio in terms of sharp ratio and maximum drawdown. Moreover, this paper also studies an enhancement strategy based on the Risk Parity Portfolio focusing on and using co-integration relationship in multi period optimization problem. This enhancement strategy may potentially generate higher returns than the traditional Risk Parity Portfolio.

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