Portfolio optimization for inventory financing: Copula-based approaches

Bangdong Zhi*, Xiaojun Wang, Fangming Xu

*Corresponding author for this work

Research output: Contribution to journalArticle (Academic Journal)peer-review

2 Citations (Scopus)

Abstract

Portfolio optimization has long been used in asset management to mitigate risks of fluctuating asset prices. In this study, we use copula models and portfolio optimization to investigate how inventory financing providers (IFP) can utilize the timely market information of collaterals to optimize their portfolios of collaterals to mitigate default risks. Through comparing the predictive performance of copula strategies with that of the multivariate normal distribution (MVN) strategy, we find that the general canonical vine copula can characterize the dependence structure among collateral return series and has superior predictive performance over the MVN and other copulas. Our findings suggest that the general canonical vine copula can be constructed into portfolio strategies that can be adopted by the IFP to mitigate default risks and improve their risk profile.
Original languageEnglish
Article number105481
Pages (from-to)1-11
Number of pages11
JournalComputers and Operations Research
Volume136
Early online date16 Jul 2021
DOIs
Publication statusPublished - 1 Dec 2021

Bibliographical note

Funding Information:
This research did not receive any specific grant from funding agencies in the public, commercial, or not-for-profit sectors.

Publisher Copyright:
© 2021

Keywords

  • Portfolio Optimization
  • Copulas
  • Inventory Financing
  • Risk Management

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