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Vine copulas: modelling systemic risk and enhancing higher‐moment portfolio optimisation
Author(s) -
Low Rand Kwong Yew
Publication year - 2018
Publication title -
accounting and finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.645
H-Index - 49
eISSN - 1467-629X
pISSN - 0810-5391
DOI - 10.1111/acfi.12274
Subject(s) - vine copula , portfolio , copula (linguistics) , diversification (marketing strategy) , economics , econometrics , tail dependence , portfolio optimization , modern portfolio theory , systemic risk , financial economics , mathematics , statistics , business , multivariate statistics , financial crisis , marketing , macroeconomics
Asymmetric dependence in equities markets has been shown to have detrimental effects on portfolio diversification as assets within the portfolio exhibit greater correlations during market downturns compared to market upturns. By applying the Clayton canonical vine copula (CVC) to model asymmetric dependence, we produce a measure of systemic risk across a portfolio of assets. In addition, we use the Clayton CVC to produce estimates of expected returns in an application to higher‐moment portfolio optimisation and find evidence of an improvement in performance across a range of risk‐adjusted return measures and the indices of acceptability.