Measurement and Control of Risk Contagion in Portfolio Optimization Processes

Abstract

The success of an investment portfolio is not only related to its yield, but is also influenced by market risks, especially the contagion risks that may exist between assets. Therefore, effective portfolio optimization requires first studying the risk contagion relationship between financial assets. We selected a total of six financial assets from different stock and exchange rate markets as the research objects, and explored the risk contagion relationships of various assets in the investment portfolio through Vine Copula. Research has shown that there is often a structural mutation in one or some assets of an investment portfolio, leading to significant fluctuations in investment returns. The Vine Copula model can effectively measure the risk contagion between assets caused by asset structural mutations.

Keywords

• investment portfolio
• risk contagion
• Vine Copula
• asset structure mutation