Canonical vine copulas in the context of modern portfolio management: Are they worth it?
In the context of managing downside correlations, we examine the use of multi-dimensional elliptical and asymmetric copula models to forecast returns for portfolios with 3–12 constituents. Our analysis assumes that investors have no short-sales constraints and a utility function characterized by the minimization of Conditional Value-at-Risk (CVaR). We examine the efficient frontiers produced by each model and focus on comparing two methods for incorporating scalable asymmetric dependence structures across asset returns using the Archimedean Clayton copula in an out-of-sample, long-run multi-period setting. For portfolios of higher dimensions, we find that modeling asymmetries within the marginals and the dependence structure with the Clayton canonical vine copula (CVC) consistently produces the highest-ranked outcomes across a range of statistical and economic metrics when compared to other models incorporating elliptical or symmetric dependence structures. Accordingly, we conclude that CVC copulas are ‘worth it’ when managing larger portfolios.
If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- François Longin, 2001. "Extreme Correlation of International Equity Markets," Journal of Finance, American Finance Association, vol. 56(2), pages 649-676, 04.
- Andrew J. Patton, 2002.
"On the out-of-sample importance of skewness and asymetric dependence for asset allocation,"
LSE Research Online Documents on Economics
24951, London School of Economics and Political Science, LSE Library.
- Andrew J. Patton, 2004. "On the Out-of-Sample Importance of Skewness and Asymmetric Dependence for Asset Allocation," Journal of Financial Econometrics, Society for Financial Econometrics, vol. 2(1), pages 130-168.
- Paul H. Kupiec, 1995. "Techniques for verifying the accuracy of risk measurement models," Finance and Economics Discussion Series 95-24, Board of Governors of the Federal Reserve System (U.S.).
- Thierry Ane & Cecile Kharoubi, 2003. "Dependence Structure and Risk Measure," The Journal of Business, University of Chicago Press, vol. 76(3), pages 411-438, July.
- Andrew Ang & Joseph Chen & Yuhang Xing, 2006.
Review of Financial Studies,
Society for Financial Studies, vol. 19(4), pages 1191-1239.
- Nicholas Barberis, 2000. "Investing for the Long Run when Returns Are Predictable," Journal of Finance, American Finance Association, vol. 55(1), pages 225-264, 02.
- Swanson, N.R. & White, H., 1995.
"A Models Selection Approach to Real-Time Macroeconomic Forecasting Using Linear Models and Artificial Neural Networks,"
04-95-12, Pennsylvania State - Department of Economics.
- Norman R. Swanson & Halbert White, 1997. "A Model Selection Approach To Real-Time Macroeconomic Forecasting Using Linear Models And Artificial Neural Networks," The Review of Economics and Statistics, MIT Press, vol. 79(4), pages 540-550, November.
- Norman R. Swanson & Halbert White, 1995. "A Model Selection Approach to Real-Time Macroeconomic Forecasting Using Linear Models and Artificial Neural Networks," Macroeconomics 9503004, EconWPA.
- Balduzzi, Pierluigi & Lynch, Anthony W., 1999. "Transaction costs and predictability: some utility cost calculations," Journal of Financial Economics, Elsevier, vol. 52(1), pages 47-78, April.
- Raj Aggarwal & Reena Aggarwal, 1993.
"Security Return Distributions And Market Structure: Evidence From The Nyse/Amex And The Nasdaq Markets,"
Journal of Financial Research,
Southern Finance Association;Southwestern Finance Association, vol. 16(3), pages 209-220, 09.
- Aggarwal, Raj & Aggarwal, Reena, 1993. "Security Return Distributions and Market Structure: Evidence from the NYSE/AMEX and the NASDAQ Markets," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 16(3), pages 209-20, Fall.
- Merton, Robert C., 1971.
"Optimum consumption and portfolio rules in a continuous-time model,"
Journal of Economic Theory,
Elsevier, vol. 3(4), pages 373-413, December.
- R. C. Merton, 1970. "Optimum Consumption and Portfolio Rules in a Continuous-time Model," Working papers 58, Massachusetts Institute of Technology (MIT), Department of Economics.
- Aas, Kjersti & Czado, Claudia & Frigessi, Arnoldo & Bakken, Henrik, 2009. "Pair-copula constructions of multiple dependence," Insurance: Mathematics and Economics, Elsevier, vol. 44(2), pages 182-198, April.
- Kane, Alex, 1982. "Skewness Preference and Portfolio Choice," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 17(01), pages 15-25, March.
- Campbell Harvey & John Liechty & Merrill Liechty & Peter Muller, 2010. "Portfolio selection with higher moments," Quantitative Finance, Taylor & Francis Journals, vol. 10(5), pages 469-485.
- Scott, Robert C & Horvath, Philip A, 1980. " On the Direction of Preference for Moments of Higher Order Than the Variance," Journal of Finance, American Finance Association, vol. 35(4), pages 915-19, September.
- repec:sae:ecolab:v:16:y:2006:i:2:p:1-2 is not listed on IDEAS
- Peiro, Amado, 1999. "Skewness in financial returns," Journal of Banking & Finance, Elsevier, vol. 23(6), pages 847-862, June.
- René Garcia & Georges Tsafack, 2009.
"Dependence Structure and Extreme Comovements in International Equity and Bond Markets,"
CIRANO Working Papers
- Garcia, René & Tsafack, Georges, 2011. "Dependence structure and extreme comovements in international equity and bond markets," Journal of Banking & Finance, Elsevier, vol. 35(8), pages 1954-1970, August.
- Glosten, Lawrence R & Jagannathan, Ravi & Runkle, David E, 1993.
" On the Relation between the Expected Value and the Volatility of the Nominal Excess Return on Stocks,"
Journal of Finance,
American Finance Association, vol. 48(5), pages 1779-1801, December.
- Lawrence R. Glosten & Ravi Jagannathan & David E. Runkle, 1993. "On the relation between the expected value and the volatility of the nominal excess return on stocks," Staff Report 157, Federal Reserve Bank of Minneapolis.
- Hansen, B.E., 1992.
"Autoregressive Conditional Density Estimation,"
RCER Working Papers
322, University of Rochester - Center for Economic Research (RCER).
- Simkowitz, Michael A. & Beedles, William L., 1978. "Diversification in a Three-Moment World," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 13(05), pages 927-941, December.
- Chu, Ba, 2011. "Recovering copulas from limited information and an application to asset allocation," Journal of Banking & Finance, Elsevier, vol. 35(7), pages 1824-1842, July.
- Victor DeMiguel & Lorenzo Garlappi & Raman Uppal, 2009. "Optimal Versus Naive Diversification: How Inefficient is the 1-N Portfolio Strategy?," Review of Financial Studies, Society for Financial Studies, vol. 22(5), pages 1915-1953, May.
- Harry Markowitz, 1952. "Portfolio Selection," Journal of Finance, American Finance Association, vol. 7(1), pages 77-91, 03.
- William Goetzmann & Jonathan Ingersoll & Matthew Spiegel & Ivo Welch, 2002.
"Portfolio Performance Manipulation and Manipulation-Proof Performance Measures,"
Yale School of Management Working Papers
amz2471, Yale School of Management, revised 01 Apr 2006.
- Jonathan Ingersoll & Ivo Welch, 2007. "Portfolio Performance Manipulation and Manipulation-proof Performance Measures," Review of Financial Studies, Society for Financial Studies, vol. 20(5), pages 1503-1546, 2007 17.
- Longin, Francois & Solnik, Bruno, 1995. "Is the correlation in international equity returns constant: 1960-1990?," Journal of International Money and Finance, Elsevier, vol. 14(1), pages 3-26, February.
- Stock, James H. & Watson, Mark W., 1999.
Journal of Monetary Economics,
Elsevier, vol. 44(2), pages 293-335, October.
- Fred D. Arditti, 1967. "Risk And The Required Return On Equity," Journal of Finance, American Finance Association, vol. 22(1), pages 19-36, 03.
- Ang, Andrew & Chen, Joseph, 2002. "Asymmetric correlations of equity portfolios," Journal of Financial Economics, Elsevier, vol. 63(3), pages 443-494, March.
- Anthony Hatherley & Jamie Alcock, 2007. "Portfolio construction incorporating asymmetric dependence structures: a user's guide," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 47(3), pages 447-472.
- Nancy Cromwell & Walton Taylor & James Yoder, 2000. "Diversification across mutual funds in a three-moment world," Applied Economics Letters, Taylor & Francis Journals, vol. 7(4), pages 243-245.
- Campbell R. Harvey & Akhtar Siddique, 2000. "Conditional Skewness in Asset Pricing Tests," Journal of Finance, American Finance Association, vol. 55(3), pages 1263-1295, 06.
When requesting a correction, please mention this item's handle: RePEc:eee:jbfina:v:37:y:2013:i:8:p:3085-3099. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Zhang, Lei)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.