Downside Risk and Portfolio Optimization of Energy Stocks: A Study on the Extreme Value Theory and the Vine Copula Approach

Abstract

ABSTRACT Energy stocks are potentially a hedge against inflation and have a number of advantages over other forms of energy investing. This motivates us to study on portfolio management of energy stocks. We compare the performance of proposed GARCH-EVT-vine copula models under three different dimensions with other competing models using energy stocks from the U.S. market. In our proposed model, we use static C- and D-vine copulas. We compare the accuracy and efficiency of different models in forecasting portfolio VaR and CVaR. We also examine whether the proposed models yield greater economic and statistical performances than the competing models in a tactical asset allocation framework. Our findings indicate that the proposed models perform best overall. In fact, the relatively better performance of the proposed model is even more prominent when the portfolio size increases. Further, the comparative analysis between GARCHEVT-static vine and GARCH-EVT-dynamic vine copula models produces mixed results.