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A New Multivariate Nonlinear Time Series Model for Portfolio Risk Measurement: The Threshold Copula-Based TAR Approach

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  • Tata Subba Rao
  • Granville Tunnicliffe Wilson
  • Shiu Fung Wong
  • Howell Tong
  • Tak Kuen Siu
  • Zudi Lu

Abstract

We propose a threshold copula-based nonlinear time series model for evaluating quantitative risk measures for financial portfolios with a flexible structure to incorporate nonlinearities in both univariate (component) time series and their dependent structure. We incorporate different dependent structures of asset returns over different market regimes, which are manifested in their price levels. We estimate the model parameters by a two-stage maximum likelihood method. Real financial data and appropriate statistical tests are used to illustrate the efficacy of the proposed model. Simulated results for sampling distribution of parameters estimates are given. Empirical results suggest that the proposed model leads to significant improvement of the accuracy of value-at-risk forecasts at the portfolio lev
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Suggested Citation

  • Tata Subba Rao & Granville Tunnicliffe Wilson & Shiu Fung Wong & Howell Tong & Tak Kuen Siu & Zudi Lu, 2017. "A New Multivariate Nonlinear Time Series Model for Portfolio Risk Measurement: The Threshold Copula-Based TAR Approach," Journal of Time Series Analysis, Wiley Blackwell, vol. 38(2), pages 243-265, March.
    • Handle: RePEc:bla:jtsera:v:38:y:2017:i:2:p:243-265
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    File URL: http://hdl.handle.net/10.1111/jtsa.12206
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    References listed on IDEAS

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    4. Paul H. Kupiec, 1995. "Techniques for verifying the accuracy of risk measurement models," Finance and Economics Discussion Series 95-24, Board of Governors of the Federal Reserve System (U.S.).
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    Cited by:

    1. Shulin Zhang & Qian M. Zhou & Huazhen Lin, 2021. "Goodness-of-fit test of copula functions for semi-parametric univariate time series models," Statistical Papers, Springer, vol. 62(4), pages 1697-1721, August.
    2. Zaichao Du & Pei Pei, 2020. "Backtesting portfolio value‐at‐risk with estimated portfolio weights," Journal of Time Series Analysis, Wiley Blackwell, vol. 41(5), pages 605-619, September.

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    More about this item

    JEL classification:

    • C10 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - General
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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