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Portfolio Value-at-Risk with Time-Varying Copula: Evidence From the Americas
Company: Marmara University
Year Of Publication: 2007
Month Of Publication: April
Pages: 14
Download Count: 422
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Comment Num: 0
Language: EN
Who Can Read: Free
Date: 4-14-2007
Publisher: Administrator
Model risk in the estimation of value-at-risk is a challenging threat for the success of any financialinvestments. The degree of the model risk increases when the estimation process is constructed with aportfolio in the emerging markets. The proper model should both provide flexible joint distributionsby splitting the marginality from the dependencies among the financial assets within the portfolio andalso capture the non-linear behaviours and extremes in the returns arising from the special features ofthe emerging markets. In this paper, we use time-varying copula to estimate the value-at-risk of theportfolio comprised of the Bovespa and the IPC Mexico in equal and constant weights. Theperformance comparison of the copula model to the EWMA portfolio model made by theChristoffersen back-test shows that the copula model captures the extremes most successfully. Thecopula model, by estimating the portfolio value-at-risk with the least violation number in the backtests,provides the investors to allocate the minimum regulatory capital requirement in accordance withthe Basel II Accord.
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