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Portfolio selection via high-dimensional stochastic factor Copula

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  • Chen, Zhenlong
  • Chang, Jing
  • Hao, Xiaozhen

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.

Suggested Citation

  • Chen, Zhenlong & Chang, Jing & Hao, Xiaozhen, 2024. "Portfolio selection via high-dimensional stochastic factor Copula," Finance Research Letters, Elsevier, vol. 67(PA).
    • Handle: RePEc:eee:finlet:v:67:y:2024:i:pa:s1544612324007815
    DOI: 10.1016/j.frl.2024.105751
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