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The Use of Archimedean Copulas to Model Portfolio Allocations

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  • David A. Hennessy
  • Harvey E. Lapan

Abstract

A copula is a means of generating an n‐variate distribution function from an arbitrary set of n univariate distributions. For the class of portfolio allocators that are risk averse, we use the copula approach to identify a large set of n‐variate asset return distributions such that the relative magnitudes of portfolio shares can be ordered according to the reversed hazard rate ordering of the n underlying univariate distributions. We also establish conditions under which first‐ and second‐degree dominating shifts in one of the n underlying univariate distributions increase allocation to that asset. Our findings exploit separability properties possessed by the Archimedean family of copulas.

Suggested Citation

  • David A. Hennessy & Harvey E. Lapan, 2002. "The Use of Archimedean Copulas to Model Portfolio Allocations," Mathematical Finance, Wiley Blackwell, vol. 12(2), pages 143-154, April.
    • Handle: RePEc:bla:mathfi:v:12:y:2002:i:2:p:143-154
    DOI: 10.1111/1467-9965.00136
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