Choosing an optimal investment strategy: The role of robust pair-copulas based portfolios
AbstractThis paper is concerned with the efficient allocation of a set of financial assets and its successful management. Efficient diversification of investments is achieved by inputing robust pair-copulas based estimates of the expected return and covariances in the mean-variance analysis of Markowitz. Although the whole point of diversifying a portfolio is to avoid rebalancing, very often one needs to rebalance to restore the portfolio to its original balance or target. But when and why to rebalance is a critical issue, and this paper investigates several managers' strategies to keep the allocations optimal. Findings for an emerging market target return and minimum risk investments are highly significant and convincing. Although the best strategy depends on the investor risk profile, it is empirically shown that the proposed robust portfolios always outperform the classical versions based on the sample estimates, yielding higher gains in the long run and requiring a smaller number of updates. We found that the pair-copulas based robust minimum risk portfolio monitored by a manager which checks its composition twice a year provides the best long run investment.
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Bibliographic InfoArticle provided by Elsevier in its journal Emerging Markets Review.
Volume (Year): 13 (2012)
Issue (Month): 4 ()
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Web page: http://www.elsevier.com/locate/inca/620356
Pair-copulas; Optimal financial portfolios; Robust estimation; Rebalancing;
Find related papers by JEL classification:
- C01 - Mathematical and Quantitative Methods - - General - - - Econometrics
- C19 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Other
- C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models
- C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
- C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
- G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
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