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Using Extreme Value Theory and Copulas to Evaluate Market Risk
Company: Mathworks
Company Url: Click here to open
Year Of Publication: 2012
Month Of Publication: January
Resource Link: Click here to open
Download Count: 0
View Count: 2487
Comment Num: 0
Language: English
Source: white paper
Who Can Read: Free
Date: 1-3-2013
Publisher: Administrator
This demonstration models the market risk of a hypothetical global equity index portfolio with a Monte Carlo simulation technique using a Student's t copula and Extreme Value Theory (EVT). The process first extracts the filtered residuals from each return series with an asymmetric GARCH model, then constructs the sample marginal cumulative distribution function (CDF) of each asset using a Gaussian kernel estimate for the interior and a generalized Pareto distribution (GPD) estimate for the upper and lower tails. A Student's t copula is then fit to the data and used to induce correlation between the simulated residuals of each asset. Finally, the simulation assesses the Value-at-Risk (VaR) of the hypothetical global equity portfolio over a one month horizon.
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