Tail Analysis and Portfolio Strategies in the Shanghai A-Share Market: A Study Based on the Tail Quotient Correlation Coefficient

The comovement of financial markets is a central topic in empirical finance, especially following the period that the Chinese stock market shifted from the bull market to bear market in 2015. During this period, extreme events occurred in multiple institutions, which increased tail risks to the financial markets. To monitor and mitigate the financial risks, it's essential to explore the tail dependence of financial markets. This study uses the Tail Quotient Correlation Coefficient (TQCC) to analyze the tail dependence among individual stocks and across sectors in the Shanghai A-share market from 2014 to 2018, then applies this method in portfolio optimization. Our results show that tail dependence is significantly higher during bear markets than bull markets. And the tail dependence of market surges is stronger than the plummets, which indicates that the likelihood of simultaneous surges is greater. Moreover, the performance of sector indices reveals that the financial sector possesses a higher internal tail dependence and the relatively weaker tail dependence with other sectors. Finally, the portfolio optimization based on the TQCC method can improve returns and reduce risk.