Copula function approaches for the analysis of serial and cross dependence in stock returns

The description of the dynamic behavior of multiple time series represents an important point of departure to obtain accurate forecasts both in economic and financial analysis. We provide a method for the comparison of the out-of-sample performance of portfolios, respectively, ignoring and exploiting serial and cross dependence in stock returns. The serial and cross dependence is modeled using both the classical linear and easy-to-use Vector AutoRegressive and more sophisticated models making use of copula functions. After deriving the classical and copula-based VAR conditional expected returns and covariance, we construct different portfolios and compare them in terms of Sharpe ratio in an out-of-sample period.