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Liquidity-adjusted value-at-risk optimization of a multi-asset portfolio using a vine copula approach

Author

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  • Al Janabi, Mazin A.M.
  • Ferrer, Román
  • Shahzad, Syed Jawad Hussain

Abstract

This paper develops a novel approach to assess liquidity-adjusted Value-at-Risk (LVaR) optimization of multi-asset portfolios based on vine copulas and LVaR models. This framework is applied to stock markets of the G-7 countries, gold, commodities and Bitcoin. The results show that our approach is superior to the classical mean–variance Markowitz portfolio technique in terms of the optimal portfolio selection under a number of realistic operational and budget constraints. We find that both Bitcoin and gold improves the risk-return performance of the G-7 stock portfolio. However, Bitcoin (gold) performs better under a scenario of only long-positions (when short-selling is allowed).

Suggested Citation

  • Al Janabi, Mazin A.M. & Ferrer, Román & Shahzad, Syed Jawad Hussain, 2019. "Liquidity-adjusted value-at-risk optimization of a multi-asset portfolio using a vine copula approach," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 536(C).
    • Handle: RePEc:eee:phsmap:v:536:y:2019:i:c:s0378437119314761
    DOI: 10.1016/j.physa.2019.122579
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    References listed on IDEAS

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    More about this item

    Keywords

    Portfolio optimization; Multivariate dependence; Stock markets; Gold; Bitcoin;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G20 - Financial Economics - - Financial Institutions and Services - - - General

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