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COBra: Copula-Based Portfolio Optimization

  • Marc S. Paolella
  • Paweł Polak
Conference paper
Part of the Studies in Computational Intelligence book series (SCI, volume 753)

Abstract

The meta-elliptical t copula with noncentral t GARCH univariate margins is studied as a model for asset allocation. A method of parameter estimation is deployed that is nearly instantaneous for large dimensions. The expected shortfall of the portfolio distribution is obtained by combining simulation with a parametric approximation for speed enhancement. A simulation-based method for mean-expected shortfall portfolio optimization is developed. An extensive out-of-sample backtest exercise is conducted and comparisons made with common asset allocation techniques.

Keywords

CCC Expected shortfall GARCH Non-ellipticity Student’s t-copula 

JEL classification

C13 C32 G11 

Supplementary material

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Authors and Affiliations

  1. 1.Department of Banking and FinanceUniversity of ZurichZurichSwitzerland
  2. 2.Swiss Finance InstituteGeneva, Lausanne, Lugano, ZurichSwitzerland
  3. 3.Department of StatisticsColumbia UniversityNew YorkUSA

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