Why Tail Correlation Matters
Assets become more correlated during market stress, making diversification fail when you need it most.
Approaches
Copula Models
Capture non-linear dependence structure beyond correlation.
Regime-Switching
Different correlation matrices for calm vs stressed regimes.
Stress Testing
Scenario analysis for extreme moves.
Implementation
Use adaptive covariance scaling that increases in high-volatility regimes:
\[\Sigma_{scaled} = \Sigma_{base} \times \left(\frac{\sigma_{recent}}{\sigma_{longterm}}\right)^2\]See Adaptive Scaling for full implementation.