Canonical vine copulas in the context of modern portfolio management: Are they worth it?

Rand Kwong Yew Low, Jamie Alcock, Robert Faff, Timothy Brailsford

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58 Citations (Scopus)
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Abstract

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.

Original languageEnglish
Pages (from-to)3085-3099
Number of pages15
JournalJournal of Banking and Finance
Volume37
Issue number8
DOIs
Publication statusPublished - Aug 2013

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Portfolio management
Copula
Dependence structure
Conditional value at risk
Short-sale constraints
Modeling
Archimedean copula
Investors
Economics
Utility function
Efficient frontier
Asymmetric dependence
Asymmetry
Asset returns

Cite this

Low, Rand Kwong Yew ; Alcock, Jamie ; Faff, Robert ; Brailsford, Timothy. / Canonical vine copulas in the context of modern portfolio management: Are they worth it?. In: Journal of Banking and Finance. 2013 ; Vol. 37, No. 8. pp. 3085-3099.
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Canonical vine copulas in the context of modern portfolio management: Are they worth it? / Low, Rand Kwong Yew; Alcock, Jamie; Faff, Robert; Brailsford, Timothy.

In: Journal of Banking and Finance, Vol. 37, No. 8, 08.2013, p. 3085-3099.

Research output: Contribution to journalArticleResearchpeer-review

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