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

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Alishavandi Abdullah; Minouei Mehrzad; FallahShams Mirfaiz; Zomorodian Gholamreza

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Information Journal Paper

Title

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

Author(s)

Alishavandi Abdullah | Minouei Mehrzad | FallahShams Mirfaiz | Zomorodian Gholamreza | Issue Writer Certificate

Keywords

Portfolio Optimization

extreme value theory

Copulas functions

Garch

Conditional Value at Risk

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.

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