Use of Archimedean Copulas to Model Portfolio Allocations, The

David Hennessy and Harvey Lapan

Staff General Research Papers Archive from Iowa State University, Department of Economics

Abstract: A copula is a means of generating an n-variate distribution function from an arbitrary set of n univariate distributions. For the class of portfolio allocators that are risk averse, we use the copula approach to identify a large set of n -variate asset return distributions such that the relative magnitudes of portfolio shares can be ordered according to the reversed hazard rate ordering of the n underlying univariate distributions. We also establish conditions under which first- and second-degree dominating shifts in one of the n underlying univariate distributions increase allocation to that asset. Our findings exploit separability properties possessed by the Archimedean family of copulas.

Date: 2002-04-01
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Published in Mathematical Finance, April 2002, vol. 12 no. 2, pp. 143-154

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