Dependence structure of risk factors and diversification effects
AbstractIn this paper, we study the aggregated risk from dependent risk factors under the multivariate Extreme Value theory (EVT) framework. We consider the heavy-tailness of the risk factors as well a non-parametric tail dependence structure. This allows a large scope of models on the dependency. We assess the Value-at-Risk of a diversified portfolio constructed from dependent risk factors. Moreover, we examine the diversification effects under this setup.
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Bibliographic InfoPaper provided by Netherlands Central Bank, Research Department in its series DNB Working Papers with number 219.
Date of creation: Jul 2009
Date of revision:
Aggregated risk; diversification effect; multivariate Extreme Value Theory;
Find related papers by JEL classification:
- G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
- C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
This paper has been announced in the following NEP Reports:
- NEP-ALL-2009-08-30 (All new papers)
- NEP-MIC-2009-08-30 (Microeconomics)
- NEP-RMG-2009-08-30 (Risk Management)
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