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.
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.:
- Ang, Andrew & Chen, Joseph, 2002. "Asymmetric correlations of equity portfolios," Journal of Financial Economics, Elsevier, vol. 63(3), pages 443-494, March.
- 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.
- 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.
- R. C. Merton, 1970.
"Optimum Consumption and Portfolio Rules in a Continuous-time Model,"
58, Massachusetts Institute of Technology (MIT), Department of Economics.
- 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.
- 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.
- 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.
- François Longin, 2001. "Extreme Correlation of International Equity Markets," Journal of Finance, American Finance Association, vol. 56(2), pages 649-676, 04.
- 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.
- 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.
- 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.
- 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.
- Hansen, B.E., 1992.
"Autoregressive Conditional Density Estimation,"
RCER Working Papers
322, University of Rochester - Center for Economic Research (RCER).
- 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.
- 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.
- James H. Stock & Mark W. Watson, 1999.
NBER Working Papers
7023, National Bureau of Economic Research, Inc.
- 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.
- Andrew Ang & Joseph Chen & Yuhang Xing, 2006.
Review of Financial Studies,
Society for Financial Studies, vol. 19(4), pages 1191-1239.
- Fred D. Arditti, 1967. "Risk And The Required Return On Equity," Journal of Finance, American Finance Association, vol. 22(1), pages 19-36, 03.
- repec:sae:ecolab:v:16:y:2006:i:2:p:1-2 is not listed on IDEAS
- Kane, Alex, 1982. "Skewness Preference and Portfolio Choice," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 17(01), pages 15-25, March.
- 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.
- Harry Markowitz, 1952. "Portfolio Selection," Journal of Finance, American Finance Association, vol. 7(1), pages 77-91, 03.
- 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.
- 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.).
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
- Peiro, Amado, 1999. "Skewness in financial returns," Journal of Banking & Finance, Elsevier, vol. 23(6), pages 847-862, June.
- Nikolay Nenovsky & S. Statev, 2006. "Introduction," Post-Print halshs-00260898, HAL.
- 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.
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: (Shamier, Wendy)
If references are entirely missing, you can add them using this form.