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Dynamic Copula Modelling for Value at Risk
Company: Frontiers in Finance and Economics
Year Of Publication: 2010
Month Of Publication: January
Pages: 30
Download Count: 927
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Comment Num: 0
Language: EN
Who Can Read: Free
Date: 11-10-2006
Publisher: Administrator
Summary
This paper proposes dynamic copula and marginals functions to model the jointdistribution of risk factor returns affecting portfolios profit and loss distribution overa specified holding period. By using copulas, we can separate the marginal distribu-tions from the dependence structure and estimate portfolio Value-at-Risk, assumingfor the risk factors a multivariate distribution that can be different from the condi-tional normal one. Moreover, we consider marginal functions able to model highermoments than the second, as in the normal. This enables us to better understand whyVaR estimates are too aggressive or too conservative. We apply this methodology toestimate the 95%, 99% VaR by using Monte-Carlo simulation, for portfolios made ofthe SP500 stock index, the Dax Index and the Nikkei225 Index. We use the initialpart of the sample to estimate the models, and the the remaining part to comparethe out-of-sample performances of the different approaches, using various back-testingtechnique
Author(s)
Fantazzini, Dean Sign in to follow this author
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