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Measuring market risk: a copula and extreme value approach

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  • Alexandru Stanga
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    Abstract

    This paper presents a methodology for measuring the risk of a portfolio composed of assets with heteroscedastic return series. In order to obtain good estimates for Value-at-Risk and Expected Shortfall, the model tries to capture as realistically as possible the data generating process for each return series and also the dependence structure that exists at the portfolio level. For this purpose, the individual return series are modelled using GARCH methods with semi-parametric innovations and the dependence structure is defined with the help of a Student t copula. The model built with these techniques is then used for the simulation of a portfolio return distribution that allows the estimation of the risk measures. This methodology is applied to a portfolio of five Romanian stocks and the accuracy of the risk measures is then tested using a backtesting procedure.

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    File URL: http://www.dofin.ase.ro/Working%20papers/Stanga%20Alexandru/alexandru.stanga.dissertation.pdf
    File Function: First version, 2008
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    Bibliographic Info

    Paper provided by Bucharest University of Economics, Center for Advanced Research in Finance and Banking - CARFIB in its series Advances in Economic and Financial Research - DOFIN Working Paper Series with number 13.

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    Date of creation: Jul 2008
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    Handle: RePEc:cab:wpaefr:13

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    Keywords: Value-at-Risk;

    References

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    1. Tae-Hwy Lee & Yong Bao & Burak Saltoglu, 2006. "Evaluating predictive performance of value-at-risk models in emerging markets: a reality check," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 25(2), pages 101-128.
    2. Bouye, Eric & Durlleman, Valdo & Nikeghbali, Ashkan & Riboulet, Gaël & Roncalli, Thierry, 2000. "Copulas for finance," MPRA Paper 37359, University Library of Munich, Germany.
    3. Jon DANIELSSON & Casper G. DE VRIES, 2000. "Value-at-Risk and Extreme Returns," Annales d'Economie et de Statistique, ENSAE, issue 60, pages 239-270.
    4. Cotter, JOhn & Dowd, Kevin, 2006. "Extreme Spectral Risk Measures: An Application to Futures Clearinghouse Margin Requirements," MPRA Paper 3505, University Library of Munich, Germany.
    5. Joshua V. Rosenberg & Til Schuermann, 2004. "A general approach to integrated risk management with skewed, fat-tailed risks," Staff Reports 185, Federal Reserve Bank of New York.
    6. Longin, Francois M., 2000. "From value at risk to stress testing: The extreme value approach," Journal of Banking & Finance, Elsevier, vol. 24(7), pages 1097-1130, July.
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