The Use of Archimedean Copulas to Model Portfolio Allocations

12 Pages Posted: 16 Jan 2003

See all articles by David A. Hennessy

David A. Hennessy

Iowa State University - Department of Economics

Harvey E. Lapan

Iowa State University - Department of Economics

Abstract

A copula is a means of generating an n-variate distribution function from an arbitrary set of n univariate distributions. For the class of portfolio allocators that are risk averse, we use the copula approach to identify a large set of n-variate asset return distributions such that the relative magnitudes of portfolio shares can be ordered according to the reversed hazard rate ordering of the n underlying univariate distributions. We also establish conditions under which first- and second-degree dominating shifts in one of the n underlying univariate distributions increase allocation to that asset. Our findings exploit separability properties possessed by the Archimedean family of copulas.

Suggested Citation

Hennessy, David A. and Lapan, Harvey E., The Use of Archimedean Copulas to Model Portfolio Allocations. Available at SSRN: https://ssrn.com/abstract=312805

David A. Hennessy (Contact Author)

Iowa State University - Department of Economics ( email )

260 Heady Hall
Ames, IA 50011
United States
515-294-6171 (Phone)

Harvey E. Lapan

Iowa State University - Department of Economics ( email )

260 Heady Hall
Ames, IA 50011
United States
515 294-5917 (Phone)

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