Portfolio selection via high-dimensional stochastic factor Copula

Zhenlong Chen, Jing Chang and Xiaozhen Hao

Finance Research Letters, 2024, vol. 67, issue PA

Abstract: In the financial market, different assets typically exhibit time-varying asymmetric dependence in scenarios of rise and fall. To accommodate this feature, this article proposes a novel model, the Skew t stochastic factor Copula model, designed to accurately capture the skewness characteristic of each variable. We employ an expectation-maximization algorithm for variable clustering and demonstrate its finite sample properties. In addition, we integrate this proposed model into a mean-ES model and explore its feasibility and applicability in financial risk measurement and portfolio optimization, supported by empirical studies.

Keywords: Stochastic factor Copula; PMCMC; Risk management; Investment portfolio (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:67:y:2024:i:pa:s1544612324007815

DOI: 10.1016/j.frl.2024.105751

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