Limitations of portfolio diversification through fat tails of the return Distributions: Some empirical evidence

This study investigates the level of risk due to fat tails return distribution and changes tail fatness (TF) through portfolio diversification. TF is not eliminated diversification, and, interestingly, positive has declining until a certain reached, while negative rising fatness. indicates that are highly relevant common factors on systematic relevance higher for compared tail. In diversification effect, further reduces risk, but does contribute this effect. The asymmetry between in corresponds trade-off relationship loss avoidance profit sacrifice expected as consequence Investors use reduce their suffering high losses, following strategy means sacrificing high-profit potential. Our provides empirical confirmation practical limitation explains why investors with diversified portfolios suffer losses from market crashes. An examination Northeast Asian stock markets China, Japan, Korea, Taiwan show identical results.