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Estimation of Portfolio Value at Risk Using Copula
Company: Reserve Bank of India
Company Url: Click here to open
Year Of Publication: 2011
Month Of Publication: April
Pages: 34
Download Count: 6
View Count: 1572
Comment Num: 0
Language: English
Source: working paper
Who Can Read: Free
Date: 5-8-2011
Publisher: Administrator
Summary
In this paper we use high-frequency multivariate data and attempt to model the joint distribution (dependence structure) of daily exchange rate returns of four major foreign currencies (USD, EURO, GBP and Swiss-Franc) against Indian rupees mainly in the copula-GARCH framework. We also compute 1-day, 99% portfolio Value at Risk (VaR) using Monte Carlo simulation technique for seven multivariate models, which were used to model the dependence structure of the four exchange rate returns. We also compare the performances of these multivariate models based on the goodness of in-sample fit as well as backtesting of VaR results. It is observed that multivariate normal distribution does not fit well the joint distribution of four exchange rate returns under consideration, and also number of exceptions raised in backtesting of VaR estimate are exceptionally high and also unconditional coverage test (binomial test/ kupiec test) and conditional coverage test (Christoffersen test) suggest that the VaR estimate is inaccurate. In contrast, VaR estimate based on other six multivariate models produce acceptable VaR estimate. However, among all thes
Author(s)
Roy, Indrajit Sign in to follow this author
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