Selecting pair-copulas with downside risk minimisation Online publication date: Sat, 28-Feb-2015
by Jin Zhang, Dietmar Maringer
International Journal of Financial Markets and Derivatives (IJFMD), Vol. 2, No. 1/2, 2011
Abstract: 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 expected shortfall minimisation. However, the Joe-Clayton copula model outperforms the EWMA in the case of Omega ratio minimisation.
Existing subscribers:
Go to Inderscience Online Journals to access the Full Text of this article.
If you are not a subscriber and you just want to read the full contents of this article, buy online access here.Complimentary Subscribers, Editors or Members of the Editorial Board of the International Journal of Financial Markets and Derivatives (IJFMD):
Login with your Inderscience username and password:
Want to subscribe?
A subscription gives you complete access to all articles in the current issue, as well as to all articles in the previous three years (where applicable). See our Orders page to subscribe.
If you still need assistance, please email subs@inderscience.com