TY - DATA T1 - Diversification Meltdown or the Impact of Fat Tails on Conditional Correlation? PY - 2017/06/07 AU - Campbell, Rachel AU - Forbes, Catherine S. AU - Koedijk, Kees AU - Kofman, Paul UR - https://bridges.monash.edu/articles/journal_contribution/Diversification_Meltdown_or_the_Impact_of_Fat_Tails_on_Conditional_Correlation_/5084764 DO - 10.4225/03/593768f32b133 L4 - https://ndownloader.figshare.com/files/8617006 KW - monash:2336 KW - 1959.1/2336 KW - Truncated correlation KW - Conditional correlation KW - 2003 KW - Bivariate Student-t correlation N2 - A perceived increase in correlation during turbulent market conditions implies a reduction in the benefits arising from portfolio diversification. Unfortunately, it is exactly then that these benefits are most needed. To determine whether diversification truly breaks down, we investigate the robustness of a popular conditional correlation estimator against alternative distributional assumptions. Analytical results show that the apparent meltdown in diversification could be a result of assuming normally distributed returns. A more realistic assumption - the bivariate Student-t distribution - suggests that there is little empirical support for diversification meltdown. ER -