We solve for the optimal portfolio allocation in a setting where both conditional correlation and the clustering of extreme events are considered. We demonstrate that there is a substantial welfare loss in disregarding tail dependence, even when dynamic conditional correlation has been accounted...

The paper investigates the portfolio allocation effects of increased asset co-movements during extreme market downturns. We develop a model for the state variables underlying the stock price process that allows for increased and asymmetric dependence between extreme return realizations. We...

In this paper we address the issue of modeling extreme asset co-movements and their implications for the hedging demands of a dynamic portfolio. We propose a model that is able to accommodate an extremal dependence structure through the stationary distribution of the state variables underlying...