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Applying Copula Function to Risk Management
Company: Banca Roma
Company Url: Click here to open
Year Of Publication: 2002
Month Of Publication: April
Pages: 25
Download Count: 2620
View Count: 9966
Comment Num: 0
Language: EN
Source:
Who Can Read: Free
Date: 10-4-2002
Publisher: Administrator
Summary
This paper is part of the author’s Ph. D. Thesis “Extreme Value Theory and coherent risk measures: applications to risk management”. The copula function describes the dependence structure of a multivariate random variable. In this paper, it is used as a practical and flexible instrument to generate Monte Carlo scenarios of risk factor returns. These risk factors affect the value of a credit or market portfolio. In fact, many of the models commonly used assume a multinormal distribution of such risk factor returns (or log-returns). This hypothesis underestimates the probability that a catastrophic event, such as a simultaneous slump of equity prices or the joint default of several counterparties in a credit portfolio, might occur. This kind of event worries both risk managers and supervisors. Our goal is to show that the use of a copula function different from the Gaussian copula can model such extreme events effective
Author(s)
Romano, Claudio Sign in to follow this author
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