The Most Entropie Canonical Copula with an Application to 'Style' Investment

We propose a new approach to recover relative entropy measures of dependence from limited infor mation by constructing the most entropic copulas (MECs) and their canonical form, namely, the most entropic canonical copula (MECC). In the empirical study, we focus on an application of the MECC theory to a 'style investing' problem for an investor with a constant relative risk aversion (CRRA) utility function allocating wealth between the Russell 1000 'growth' and 'value' indices. We found that, using the data in hand, the gains from using the MECC (vis-à-vis commonly used parametric copulas) to model the dependence between the indices' returns for our investment strategies are economically and statistically significant for the case with/without short-sales constraints