The Most Entropic Canonical Copula with an Application To 'Style' Investment

We propose a new approach to recover relative entropy measures of dependence from limited information by constructing the most entropic copulas (MEC) and their canonical forms, namely, the most entropic canonical copulas (MECC). We show that our approach is in duality with the existing approaches such as the approach of minimum Kullback-Leibler cross entropy. Our empirical analysis focuses on an application of the MEC theory to a 'style investing' problem for an investor with constant relative risk aversion allocating wealth between the Russell 1000 'growth' and 'value' indices. We found that the gains from using the MECC in forming investment strategies are economically and statistically significant for the case with/without short-sales constraints