We apply our method to analyze which portfolios are capable of providing superior performance to those based on the Sharpe ratio.
In this paper we illustrate the use of conditional copulas for identifying differences in alternative portfolio performance strategies. We analyze which portfolios are capable of providing superior performance to those based on the Sharpe ratio.
Our results show that under the Gaussian copula, both expected tail ratio and skewness-kurtosis ratio portfolios exhibit remarkably low correlations respecting the Sharpe ratio (SR) portfolio. This means that these two portfolios are different respecting the SR one. We also find that copulas which focus on either the upper tail (Gumbel) or the lower tail (Clayton) render significant differences. In short, our copula analysis is useful to understand what kind of equity-screening strategy based on its corresponding performance measure performs better in relation to the SR portfolio.
Our copula methods to evaluate models' performance differences is significant because when models’ performance is rather similar, conclusions on statistical differences, can be defective as they may hinge on the subsample type or size used, leading to inefficient investment decisions. Our method contributes to address this issue.