Correlation Analysis and Optimal Portfolio in UK and US Stock Markets- Based on Copula-VaR Function

Abstract

Studying the correlation between the various stock and selecting the risk of the optimal portfolio are the key topics of current research. In the macro field, it is a further problem with delving into the correlation in the different stock markets. The researchers found that the copula function can break the restrictions of traditional normal hypothesis and linear correlation, which has a significant advantage in studying the correlation of the stock market to choose the optimal portfolio. This study employed S&P500 to represent the American stock market, FTSE to represent the British stock market, model and select the best copula function through copula function, and applied risk management (VaR) analysis to obtain the best portfolio to select British and American stocks. The research results show that the student’s t Copula function of the five copula functions best fits the two stock markets in Britain and the United States. The correlation between them reveals a descendent trend from the extreme upward stage to the extreme downward stage. Finally, it is suggested that investors choose 60% FTSE and 40% S&P500 for their investment portfolio.