Title

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

Date of this Version

3-23-2013

Document Type

Journal Article

Publication Details

Citation only

Low, R.K.Y, Alcock, J., Faff, R., & Brailsford, T. (2013). Canonical vine copulas in the context of modern portfolio management: Are they worth it? Journal of Banking & Finance, 37(8), 3085-3099.

Access the journal

2013 HERDC submission. FoR code: 150200; 010200

© Copyright, Elsevier B.V., 2013

ISSN

0378-4266

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.

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This document has been peer reviewed.