COBra: Copula-Based Portfolio Optimization

Marc S. Paolella, Pawel Polak

Abstract: The meta-elliptical t copula with noncentral t GARCH univariate margins is studied as a model for asset allocation. A method of parameter estimation is deployed that is nearly instantaneous for large dimensions. The expected shortfall of the portfolio distribution is obtained by combining simulation with a parametric approximation for speed enhancement. A simulation-based method for mean-expected shortfall portfolio optimization is developed. An extensive out-of-sample backtest exercise is conducted and comparisons made with common asset allocation techniques.