  We employ and examine vine copulas in modeling symmetric and asymmetric
dependency structures and forecasting financial returns. We analyze the asset
allocations performed during the 2008-2009 financial crisis and test different
portfolio strategies such as maximum Sharpe ratio, minimum variance, and
minimum conditional Value-at-Risk. We then specify the regular, drawable, and
canonical vine copulas, such as the Student-t, Clayton, Frank, Joe, Gumbel, and
mixed copulas, and analyze both in-sample and out-of-sample portfolio
performances. Out-of-sample portfolio back-testing shows that vine copulas
reduce portfolio risk better than simple copulas. Our econometric analysis of
the outcomes of the various models shows that in terms of reducing conditional
Value-at-Risk, D-vines appear to be better than R- and C-vines. Overall, we
find that the Student-t drawable vine copula models perform best with regard to
risk reduction, both for the entire period 2005-2012 as well as during the
financial crisis.
