Portfolio Optimization under Varying Market Risk Conditions: Copula Dependence and Marginal Value Approaches

محورهای موضوعی : Financial Economics

Jila Ahmadi ¹ (Department of Management, Kashan Branch, Islamic Azad University, Kashan, Iran)
Hasan Ghodrati Ghezaani ² (Department of Management, Kashan Branch, Islamic Azad University, Kashan, Iran)
Mehdi Madanchi Zaj ³ (Department of Financial Management, Electronic Unit, Islamic Azad University, Tehran, Iran)
Hossein Jabbari ⁴ (Department of Accounting and Management, Kashan Branch, Islamic Azad University, Kashan, Iran)
Aliakbar Farzinfar ⁵ (Department of Accounting and Management, Kashan Branch, Islamic Azad University, Kashan, Iran)

تاریخ دریافت : 1401/06/15 تاریخ پذیرش : 1401/11/20 تاریخ انتشار : 1402/09/10

کلید واژه: COPULA, Extreme Value Theory, Asset Portfolio, Market risk,

چکیده مقاله :

This paper aims to investigate the portfolio optimization under various market risk conditions using copula dependence and extreme value approaches. According to the modern portfolio theory, diversifying investments in assets that are less correlated with one another allows investors to assume less risk. In many models, asset returns are assumed to follow a normal distribution. Consequently, the linear correlation coefficient explains the dependence between financial assets, and the Markowitz mean-variance optimization model is used to calculate efficient asset portfolios. In this regard, monthly data-driven information on the top 30 companies from 2011 to 2021 was the subject to consideration. In addition, extreme value theory was utilized to model the asset return distribution. Using Gumbel’s copula model, the dependence structure of returns has been analyzed. Distribution tails were modeled utilizing extreme value theory. If the weights of the investment portfolio are allocated according to Gumbel’s copula model, a risk of 2.8% should be considered to obtain a return of 3.2%, according to the obtained results.

چکیده انگلیسی:

This paper aims to investigate the portfolio optimization under various market risk conditions using copula dependence and extreme value approaches. According to the modern portfolio theory, diversifying investments in assets that are less correlated with one another allows investors to assume less risk. In many models, asset returns are assumed to follow a normal distribution. Consequently, the linear correlation coefficient explains the dependence between financial assets, and the Markowitz mean-variance optimization model is used to calculate efficient asset portfolios. In this regard, monthly data-driven information on the top 30 companies from 2011 to 2021 was the subject to consideration. In addition, extreme value theory was utilized to model the asset return distribution. Using Gumbel’s copula model, the dependence structure of returns has been analyzed. Distribution tails were modeled utilizing extreme value theory. If the weights of the investment portfolio are allocated according to Gumbel’s copula model, a risk of 2.8% should be considered to obtain a return of 3.2%, according to the obtained results.

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