Choosing an optimal investment strategy: The role of robust pair-copulas based portfolios

Beatriz Vaz de Melo Mendes and Daniel S. Marques

Emerging Markets Review, 2012, vol. 13, issue 4, 449-464

Abstract: This paper is concerned with the efficient allocation of a set of financial assets and its successful management. Efficient diversification of investments is achieved by inputing robust pair-copulas based estimates of the expected return and covariances in the mean-variance analysis of Markowitz. Although the whole point of diversifying a portfolio is to avoid rebalancing, very often one needs to rebalance to restore the portfolio to its original balance or target. But when and why to rebalance is a critical issue, and this paper investigates several managers' strategies to keep the allocations optimal. Findings for an emerging market target return and minimum risk investments are highly significant and convincing. Although the best strategy depends on the investor risk profile, it is empirically shown that the proposed robust portfolios always outperform the classical versions based on the sample estimates, yielding higher gains in the long run and requiring a smaller number of updates. We found that the pair-copulas based robust minimum risk portfolio monitored by a manager which checks its composition twice a year provides the best long run investment.

Keywords: Pair-copulas; Optimal financial portfolios; Robust estimation; Rebalancing (search for similar items in EconPapers)
JEL-codes: C01 C19 C32 C51 C58 G11 (search for similar items in EconPapers)
Date: 2012
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (9)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S1566014112000489
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:ememar:v:13:y:2012:i:4:p:449-464

DOI: 10.1016/j.ememar.2012.07.005

Access Statistics for this article

Emerging Markets Review is currently edited by Jonathan A. Batten

More articles in Emerging Markets Review from Elsevier
Bibliographic data for series maintained by Catherine Liu ().