Abstract
We propose a model for optimizing structured portfolios with liquidity-adjusted Value-at-Risk (LVaR) constraints, whereby linear correlations between assets are replaced by the multivariate nonlinear dependence structure based on Dynamic conditional correlation t-copula modeling. Our portfolio optimization algorithm minimizes the LVaR function under adverse market circumstances and multiple operational and financial constraints. When considering a diversified portfolio of international stock and commodity market indices under multiple realistic portfolio optimization scenarios, the obtained results consistently show the superiority of our approach, relative to other competing portfolio strategies including the minimum-variance, risk-parity and equally weighted portfolio allocations.
Original language | English |
---|---|
Pages (from-to) | 1121-1131 |
Number of pages | 11 |
Journal | European Journal of Operational Research |
Volume | 259 |
Issue number | 3 |
DOIs | |
Publication status | Published - Jun 16 2017 |
Externally published | Yes |
Keywords
- Dependence structure
- Dynamic copulas
- Finance
- LVaR
- Portfolio optimization algorithm
ASJC Scopus subject areas
- General Computer Science
- Modelling and Simulation
- Management Science and Operations Research
- Information Systems and Management