Multivariate dependence and portfolio optimization algorithms under illiquid market scenarios

Mazin A.M. Al Janabi, Jose Arreola Hernandez, Theo Berger and Duc Khuong Nguyen

European Journal of Operational Research, 2017, vol. 259, issue 3, 1121-1131

Abstract: We propose a model for optimizing structured portfolios with liquidity-adjusted Value-at-Risk (LVaR) constraints, whereby linear correlations between assets are replaced by the multivariate nonlinear dependence structure based on Dynamic conditional correlation t-copula modeling. Our portfolio optimization algorithm minimizes the LVaR function under adverse market circumstances and multiple operational and financial constraints. When considering a diversified portfolio of international stock and commodity market indices under multiple realistic portfolio optimization scenarios, the obtained results consistently show the superiority of our approach, relative to other competing portfolio strategies including the minimum-variance, risk-parity and equally weighted portfolio allocations.

Keywords: Finance; Dynamic copulas; LVaR; Dependence structure; Portfolio optimization algorithm (search for similar items in EconPapers)
Date: 2017
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Citations: View citations in EconPapers (25)

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Working Paper: Multivariate dependence and portfolio optimization algorithms under illiquid market scenarios (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ejores:v:259:y:2017:i:3:p:1121-1131

DOI: 10.1016/j.ejor.2016.11.019

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