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Recovering copulas from limited information and an application to asset allocation

  • Chu, Ba
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    This paper proposes an entropy-based method to construct a new class of copulas - the most entropic canonical copulas (MECC). Our empirical study focuses on an investment problem for an investor with a constant relative risk aversion (CRRA) utility function allocating wealth between the Dow Jones Large-Cap and Small-Cap indices, of which the contemporaneous dependence can be modeled by the MECC or other commonly-used copulas. Both the theoretical analysis of the method and the empirical study indicate the potential for enormous statistical and economic gains as a result of using the MECC.

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    File URL: http://www.sciencedirect.com/science/article/pii/S0378426610004589
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    Article provided by Elsevier in its journal Journal of Banking & Finance.

    Volume (Year): 35 (2011)
    Issue (Month): 7 (July)
    Pages: 1824-1842

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    Handle: RePEc:eee:jbfina:v:35:y:2011:i:7:p:1824-1842
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