Journal of Risk

Could holding multiple safe havens improve diversification in a portfolio? The extended skew-t vine copula approach

Meng-Shiuh Chang, Jing Yuan and Jing Xu

  • We propose a vine copula model based on a bivariate extended skew-t distribution.
  • The multivariate tail dependence function of extended skew-t copula vine is provided.
  • Our proposed model provides better performance in the estimation of multivariate tail dependence.
  • We examine the safe haven property of gold and USD against stocks.
  • Incorporating multiple safe havens does not improve diversification in the portfolio

We propose a vine copula model based on a bivariate extended skew-t distribution and derive its corresponding multivariate tail dependence function. Our simulations demonstrate that the proposed estimator dominates the conventional vine copula approach in the estimation of multivariate tail dependence. We apply our model to a safe haven analysis of US dollars (US$) and gold prices against stocks. The estimated multivariate lower tail dependence coefficients suggest that even though either US$ or gold can be safe haven assets against stocks, combining US$ and gold in a portfolio does not provide a safe haven property  against stocks. Therefore, incor- porating multiple safe haven assets in a portfolio may end in heavier losses in the event of a market downturn. Our results highlight the importance of simultaneously investigating multiple safe haven assets in financial risk analysis.

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