Vine Copula Application on Exchange Traded Funds Holdings

Author: Jianyu Kang
Degree: M.S. in Financial Engineering
Year: 2019
Advisory Committee: Dr. Khaldoun Khashanah, Dr. Dragos Bozdog

Abstract: Along with the increase in popularity of Exchange Traded Funds(ETFs), the concern of mispricing is raising as well, especially during intraday trading. In this dissertation we will verify this by constructing a synthetic portfolio of Financial Select Sector SPDR Fund (ticker XLF) based on the weight provided in the ETF prospectus, and explore whether the value of the XLF is aligned with the value of the synthetic portfolio.

Furthermore, we are also interested in the portfolio optimization of XLF by reevaluating the indicator value-at-risk and expected shortfall to maximize the return of portfolio without increasing the risk. To achieve that, we have introduced vine copulas to determine the relationship between XLF and its holdings. Copulas are a widely accepted method to construct multivariate distributions, and especially useful when investigating dependence structure between random variables.