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Portfolio optimization based on GARCH-EVT-Copula forecasting models
Linnaeus University, Växjö, Sweden.
Jönköping University, Jönköping International Business School, JIBS, Center for Family Enterprise and Ownership (CeFEO). Jönköping University, Jönköping International Business School, JIBS, Economics.ORCID iD: 0000-0001-5776-9396
Åbo Akademi, Turku, Finland.
2018 (English)In: International Journal of Forecasting, ISSN 0169-2070, E-ISSN 1872-8200, Vol. 34, no 3, p. 497-506Article in journal (Refereed) Published
Abstract [en]

Abstract This study uses GARCH-EVT-copula and ARMA-GARCH-EVT-copula models to perform out-of-sample forecasts and simulate one-day-ahead returns for ten stock indexes. We construct optimal portfolios based on the global minimum variance (GMV), minimum conditional value-at-risk (Min-CVaR) and certainty equivalence tangency (CET) criteria, and model the dependence structure between stock market returns by employing elliptical (Student- t and Gaussian) and Archimedean (Clayton, Frank and Gumbel) copulas. We analyze the performances of 288 risk modeling portfolio strategies using out-of-sample back-testing. Our main finding is that the CET portfolio, based on ARMA-GARCH-EVT-copula forecasts, outperforms the benchmark portfolio based on historical returns. The regression analyses show that GARCH-EVT forecasting models, which use Gaussian or Student- t copulas, are best at reducing the portfolio risk.

Place, publisher, year, edition, pages
Elsevier, 2018. Vol. 34, no 3, p. 497-506
Keyword [en]
GARCH models, Extreme value theory, Copula models, Conditional value-at-risk, Portfolio optimization
National Category
Probability Theory and Statistics
Identifiers
URN: urn:nbn:se:hj:diva-39383DOI: 10.1016/j.ijforecast.2018.02.004Local ID: IHHCeFEOISOAI: oai:DiVA.org:hj-39383DiVA, id: diva2:1204914
Available from: 2018-05-09 Created: 2018-05-09 Last updated: 2018-05-09Bibliographically approved

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Publisher's full texthttps://www.sciencedirect.com/science/article/pii/S0169207018300396

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Stephan, Andreas

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  • apa
  • harvard1
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  • vancouver
  • Other style
More styles
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  • de-DE
  • en-GB
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Output format
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