Portfolio management with tail dependence using dynamic symmetrized Joe-Clayton copula
Hatherley and Alcock (2007) reported that the Markowitz model tends to underestimate the potential losses that may occur in the presence of extreme market events (crashes) for a given level of expected return. We check that the strategies with tail dependence overcame Talmud rule, the Markowitz model and the model of Tu and Zhou (2011) by simulating 1,000 portfolios with 3, 5, 10 and 20 randomly selected assets from DJIA for the period 03/1990 until 12/2012. We conclude that models of tail dependence and Markowitz had more performance than Talmud and the Tu and Zhou (2011) model for portfolios with 3, 5, 10 and 20 assets. A tail dependence model overcome Markowitz, in terms of cumulative return, in over 60% of months considered in the analysis. The results indicate that the Talmud rule should be discarded in a context of constructing portfolios with individual stocks ahead strategies with tail dependence.