Estimating value at risk of portfolio by conditional copula-GARCH method |
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Authors: | Jen-Jsung Huang Hueimei Liang |
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Institution: | a Department of Finance, National Sun Yat-sen University, 70, Lienhai Rd. Kaohsiung 80424, Taiwan, ROC b Department of Commerce Automation and Management, National Pingtung Institute of Commerce, 51, Minsheng E. Rd., Pingtung City 900, Taiwan, ROC c Department of Business Administration, National Sun Yat-sen University, 70, Lienhai Rd. Kaohsiung 80424, Taiwan, ROC |
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Abstract: | Copula functions represent a methodology that describes the dependence structure of a multi-dimension random variable and has become one of the most significant new tools to handle risk factors in finance, such as Value-at Risk (VaR), which is probably the most widely used risk measure in financial institutions. Combining copula and the forecast function of the GARCH model, this paper proposes a new method, called conditional copula-GARCH, to compute the VaR of portfolios. This work presents an application of the copula-GARCH model in the estimation of a portfolio’s VaR, composed of NASDAQ and TAIEX. The empirical results show that, compared with traditional methods, the copula model captures the VaR more successfully. In addition, the Student-t copula describes the dependence structure of the portfolio return series quite well. |
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Keywords: | Copula GARCH VaR |
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