International Journal of Nonlinear Analysis and Applications

Proposing a portfolio optimization model based on the GARCH-EVT-Copula combined approach

Document Type : Research Paper

Authors

1 Department of Financial Management, Central Tehran Branch, Islamic Azad University, Tehran, Iran.

2 Department of Industrial Management, Central Tehran Branch, Islamic Azad University, Tehran, Iran

3 Department of Financial Management, Central Tehran Branch, Islamic Azad University, Tehran, Iran

Abstract

This study aims at optimizing the portfolio of financial assets and in particular focuses on the stock market with conditional value at risk (CVaR) as the portfolio risk measure. This study uses generalized conditional heterogeneity variance methods, the dependency structure, the extreme value theory, and with the GARCH-EVT-Vine-Copula approach to optimize the portfolio and minimize the CVaR of a stock portfolio during a certain period by the re-weighting method. Modeling is based on the performance data of 7 companies among the top 50 listed companies during the period 2015 to 2021. The results show that considering the extreme values and structural dependence between the examined time series improves the risk identification between these markets. In addition, among the studied models, the out-of-sample results for the accumulated wealth function of different models show that when considering the dependence structure, the EGARCH-EVT model based on the Coppola Vine function results outperforms other models.

Keywords

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International Journal of Nonlinear Analysis and Applications
Volume 14, Issue 6
June 2023
Pages 197-210
  • Receive Date: 13 April 2022
  • Revise Date: 07 June 2022
  • Accept Date: 28 June 2022