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Strategic asset allocation by mixing shrinkage, vine copula and market equilibrium

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  • Fan Zhang
  • Zhichao Zhang

Abstract

We propose a new portfolio optimization method combining the merits of the shrinkage estimation, vine copula structure, and Black–Litterman model. It is useful for many investors to satisfy simultaneously the three investment objectives: estimation sensitivity, asymmetric risks appreciation, and portfolio stability. A typical investor with such objectives is a sovereign wealth fund (SWF). We use China's SWF as an example to empirically test the method based on a 15†asset strategic asset allocation problem. Robustness tests using subsamples not only show the method's overall effectiveness but also manifest that the function of each component is as expected.

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  • Fan Zhang & Zhichao Zhang, 2018. "Strategic asset allocation by mixing shrinkage, vine copula and market equilibrium," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 37(3), pages 340-351, April.
    • Handle: RePEc:wly:jforec:v:37:y:2018:i:3:p:340-351
    DOI: 10.1002/for.2506
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    Cited by:

    1. Ruili Sun & Tiefeng Ma & Shuangzhe Liu & Milind Sathye, 2019. "Improved Covariance Matrix Estimation for Portfolio Risk Measurement: A Review," JRFM, MDPI, vol. 12(1), pages 1-34, March.
    2. Zhu, Pengfei & Tang, Yong & Wei, Yu & Dai, Yimin, 2019. "Portfolio strategy of International crude oil markets: A study based on multiwavelet denoising-integration MF-DCCA method," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 535(C).

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