Asymmetry in Tail Dependence of Equity Portfolios

In this paper, we investigate the asymmetry in the tail dependence between USequity portfolios and the aggregate US market. Given the limited number of ob-servations in the tails of a joint distribution, standard non-parametric measures oftail dependence often have poor nite-sample properties. We therefore develop aparametric model for measuring and testing asymmetry in tail dependence, usingthe noncentral t distribution initially described by Kshirsagar (1961). This modelallows calibrating dierent levels of tail dependence depending on the sign of theextreme returns. It also accommodates situations in which the volatilities or thecorrelations across returns are time varying. We nd that, for small rms, valuerms, past losers, and past winners, the tail dependence with the market portfoliois higher on the downside than on the upside.[...]