Portfolio Selection Based on a Simulated Copula

In this paper, we propose a methodology to value the portfolio choices based on the prediction of future returns where the dependence structure of joint returns and the behavior of single returns are estimated separately. In particular, we assume the marginals evolve as an ARMA(0,2)-GARCH(0,2) model with stable paretian residuals and the joint distribution of residuals is estimated with an asymmetric t-copula. Then, we compare the ex-post …nal wealth sample paths of di¤erent strategies based on reward/risk ratios. Doing so we examine and discuss the impact of the forecasting method with respect to classic myopic portfolio strategies based on the same reward/risk ratios.