Recovering copulas from limited information and an application to asset allocation
Journal of Banking & Finance, 2011, vol. 35, issue 7, 1824-1842
This paper proposes an entropy-based method to construct a new class of copulas - the most entropic canonical copulas (MECC). Our empirical study focuses on an investment problem for an investor with a constant relative risk aversion (CRRA) utility function allocating wealth between the Dow Jones Large-Cap and Small-Cap indices, of which the contemporaneous dependence can be modeled by the MECC or other commonly-used copulas. Both the theoretical analysis of the method and the empirical study indicate the potential for enormous statistical and economic gains as a result of using the MECC.
Keywords: Shannon; entropy; Most; entropic; copulas; The; Kullback-Leibler; cross; entropy; Rank; correlations; CRRA; utility; functions (search for similar items in EconPapers)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:35:y:2011:i:7:p:1824-1842
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