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

Low, Rand Kwong Yew, Alcock, Jamie, Faff, Robert and Brailsford, Timothy J. (2013) Canonical vine copulas in the context of modern portfolio management: are they worth it?. Journal of Banking and Finance, 37 8: 3085-3099. doi:10.1016/j.jbankfin.2013.02.036

Attached Files (Some files may be inaccessible until you login with your UQ eSpace credentials)
Name Description MIMEType Size Downloads

Author Low, Rand Kwong Yew
Alcock, Jamie
Faff, Robert
Brailsford, Timothy J.
Title Canonical vine copulas in the context of modern portfolio management: are they worth it?
Journal name Journal of Banking and Finance   Check publisher's open access policy
ISSN 0378-4266
Publication date 2013-08
Sub-type Article (original research)
DOI 10.1016/j.jbankfin.2013.02.036
Open Access Status
Volume 37
Issue 8
Start page 3085
End page 3099
Total pages 15
Place of publication Amsterdam, Netherlands
Publisher Elsevier
Collection year 2014
Language eng
Formatted abstract
• Clayton canonical vine copulas (CVC) successfully capture lower tail dependence.
• CVC are mathematically scalable for portfolios of large dimensions (our study investigates its feasibility for portfolios of up to 12 constituents).
• We focus on asset allocation for loss-averse investors by minimizing CVaR.
• CVC can give improved investment performance.
• The Clayton CVC can produce strongly positively skewed portfolios.

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.
Keyword Vine copula
Clayton copula
Asymmetric dependence
Portfolio management
Canonical vine
Conditional value-at-risk
3-moment world
Q-Index Code C1
Q-Index Status Confirmed Code
Institutional Status UQ

Document type: Journal Article
Sub-type: Article (original research)
Collections: School of Mathematics and Physics
Official 2014 Collection
UQ Business School Publications
Version Filter Type
Citation counts: TR Web of Science Citation Count  Cited 15 times in Thomson Reuters Web of Science Article | Citations
Scopus Citation Count Cited 20 times in Scopus Article | Citations
Google Scholar Search Google Scholar
Created: Wed, 17 Apr 2013, 11:54:38 EST by Karen Morgan on behalf of UQ Business School