Selecting pair-copulas with downside risk minimisation

Zhang, Jin and Maringer, Dietmar. (2011) Selecting pair-copulas with downside risk minimisation. Journal of Financial Markets and Derivatives, 2 (1-2). pp. 121-148.

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Official URL: http://edoc.unibas.ch/46328/

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Copulas provide investors with tools to model the dependence structure of financial products. The choice of copulas plays an important role in successful copula applications. This paper discusses the copula selection problem for the so-called ‘D-vine’ decomposition from a perspective of the ‘safety first’ asset allocation. The Joe-Clayton copula and the Student t copula are considered as building blocks for the D-vine structure. As an alternative to conventional approaches, the proposed pair-copula-GARCH model provides simulated asset returns for the optimal asset allocation which is implemented by using a heuristic optimisation approach. When assessing the reliability of portfolio loss prediction, it is found that the EWMA of RiskMetrics performs slightly better than the copula-GARCH models in the study of value-at-risk and expectedshortfall minimisation. However, the Joe-Clayton copula model outperforms the EWMA in the case of Omega ratio minimisation.
Faculties and Departments:06 Faculty of Business and Economics > Departement Wirtschaftswissenschaften > Professuren Wirtschaftswissenschaften > Computational Economics and Finance (Maringer)
UniBasel Contributors:Maringer, Dietmar
Item Type:Article, refereed
Article Subtype:Research Article
Publisher:Inderscience Publishers
Note:Publication type according to Uni Basel Research Database: Journal article
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Last Modified:10 Apr 2017 12:07
Deposited On:10 Apr 2017 12:07

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