Portfolio optimization of stock returns in high-dimensions: A copula-based approach

Abstract

© 2014 by the Mathematical Association of Thailand. All rights reserved. We used the multivariate t copula, which can capture the tail dependence to modeling the dependence structure of the risk in portfolio analysis. Multivariate t copula based on GARCH model was used to explain portfolio risk structure for high-dimensional asset allocation issue. With this method we used the Monte Carlo simulation and the results of multivariate t copula to estimate the expected shortfall of the portfolio. Finally, we obtained the optimal weighted for conditional Value-at-Risk (CVaR) model with the assumption of multivariate distribution to illustrate the potential model risk among portfolios returns.