GARCH-Copula Model and its Application in Portfolio Optimization

Abstract

Every investor seeks to obtain a high return and face low risk, so he makes a trade-off before investing. Investment can be in anything like stocks, bonds, utilities, education, health, retirement, or something like this. Usually, people invested in single asset, so they sometimes face high losses. In 1952, Harry Markowitz, an American Economist, developed a theory called Portfolio Selection Theory. This theory says that investing in a portfolio, i.e., investing in more than one asset simultaneously, can reduce the risk compared to investing in only one asset. He supposed that investors are to be risk-averse; hence he/she wants high returns and small risk. Markowitz used variance of return as the measurement of risk and mean of return as the measurement of expected return by the following Formula: