ORIGINAL RESEARCH article
Front. Appl. Math. Stat.
Sec. Mathematical Finance
Volume 11 - 2025 | doi: 10.3389/fams.2025.1675120
Dependence Modeling and Portfolio Optimization with Copula-GARCH: A European Investment Perspective
Provisionally accepted
- Riga Technical University, Riga, Latvia
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This paper examines advanced portfolio optimization techniques by integrating copula functions and GARCH models, with a focus on enhancing risk-adjusted performance in the European stock market. Utilizing high-performance computing (HPC), the study simulates approximately 10,000 portfolios to evaluate the effectiveness of various copula - GARCH configurations, including several GARCH-type specifications (standard GARCH, GJR-GARCH, and exponential GARCH (eGARCH)) in comparison to traditional methods, such as mean-variance optimization and historical CVaR. the study simulates approximately 10,000 portfolios to evaluate the effectiveness of various copula-GARCH configurations in comparison to traditional methods, such as mean-variance optimization and historical CVaR. Backtesting is performed across three distinct market regimes: the bearish environment of 2022, the bullish recovery of 2023, and the relatively neutral, transitional conditions of 2024. The combination of a Student's t copula with marginal Student's distributions and an eGARCH an eGARCH model consistently outperforms alternatives, particularly in minimizing Conditional Value at Risk (CVaR) while maintaining favorable return profiles. These findings underscore the robustness and scalability of copula-GARCH approaches for practical portfolio construction under varying market dynamics.
Keywords: copula, GARCH, Conditional Value at Risk (CVaR)CVaR, Portfolio optimization, European stock market, high-performance computing, Simulations
Received: 01 Aug 2025; Accepted: 06 Oct 2025.
Copyright: © 2025 Fjodorovs, Matvejevs and Vasiljeva. This is an open-access article distributed under the terms of the Creative Commons Attribution License (CC BY). The use, distribution or reproduction in other forums is permitted, provided the original author(s) or licensor are credited and that the original publication in this journal is cited, in accordance with accepted academic practice. No use, distribution or reproduction is permitted which does not comply with these terms.
* Correspondence: Jegors Fjodorovs, jegors.fjodorovs@rtu.lv
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