Canonical Vine Copulas in the Context of Modern Portfolio Management: Are They Worth it?

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

*Corresponding author for this work

Research output: Chapter in Book/Report/Conference proceedingChapterResearchpeer-review

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 min imization 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 (AD) 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 modelling 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 com pared to other models incorporating elliptical or symmetric dependence structures. Accordingly, we conclude that CVC copulas are 'worth it' when managing larger portfolios.

Original languageEnglish
Title of host publicationAssymetric Dependence in Finance
Subtitle of host publicationDiversification, Correlation and Portfolio Management in Market Downturns
EditorsJamie Alcock, Stephen Satchell
Place of PublicationChichester
PublisherJohn Wiley & Sons
Pages263-289
Number of pages27
ISBN (Electronic)9781119288992
ISBN (Print)9781119289012
DOIs
Publication statusPublished - 27 Mar 2017

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    Low, R. K. Y., Alcock, J., Faff, R., & Brailsford, T. (2017). Canonical Vine Copulas in the Context of Modern Portfolio Management: Are They Worth it? In J. Alcock, & S. Satchell (Eds.), Assymetric Dependence in Finance: Diversification, Correlation and Portfolio Management in Market Downturns (pp. 263-289). John Wiley & Sons. https://doi.org/10.1002/9781119288992.ch11