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Business Analytics

Characterising the Assymetric Dependence Premium

Associate Professor Jamie Alcock, Discipline of Finance; The University of Sydney

15th Aug 2014  11:00 am - Rm 498 Merewether Bldg H04

We examine the relative importance of asymmetric dependence (AD) and systematic risk in the cross-section of US equities. Using a ß-invariant AD metric, we demonstrate a lower-tail dependence premium equivalent to 35% of the market risk premium, compared with an upper-tail dependence discount that is 41% of the market risk premium. Lower-tail dependence displays a constant price between 1989-2009, while the discount associated with upper-tail dependence appears to be increasing in recent years. Subsequently, we find that return changes in US equities between 2007-2009 reflected changes in systematic risk and upper-tail dependence. This suggests that both systematic risk and AD should be managed in order to reduce the return impact of market downturns. Our findings have substantial implications for the cost of capital, investor expectations, portfolio management and performance assessment.

*joint work with Anthony Hatherley