Copula-Based Factor Models for Multivariate Asset Returns

Eugen Ivanov, Aleksey Min and Franz Ramsauer
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Eugen Ivanov: Department of Economics, University of Augsburg, Universitätsstr. 16, 86159 Augsburg, Germany
Aleksey Min: Department of Mathematics, Technical University of Munich, Boltzmannstr. 3, 85748 Garching, Germany
Franz Ramsauer: Department of Mathematics, Technical University of Munich, Boltzmannstr. 3, 85748 Garching, Germany

Econometrics, 2017, vol. 5, issue 2, 1-24

Abstract: Recently, several copula-based approaches have been proposed for modeling stationary multivariate time series. All of them are based on vine copulas, and they differ in the choice of the regular vine structure. In this article, we consider a copula autoregressive (COPAR) approach to model the dependence of unobserved multivariate factors resulting from two dynamic factor models. However, the proposed methodology is general and applicable to several factor models as well as to other copula models for stationary multivariate time series. An empirical study illustrates the forecasting superiority of our approach for constructing an optimal portfolio of U.S. industrial stocks in the mean-variance framework.

Keywords: COPAR model; dynamic factor model; multivariate time series; optimal mean-variance portfolio; vine copula (search for similar items in EconPapers)
JEL-codes: B23 C C00 C01 C1 C2 C3 C4 C5 C8 (search for similar items in EconPapers)
Date: 2017
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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