Copulas and bivariate risk measures : an application to hedge funds
AbstractWith hedge funds, managers develop risk management models that mainly aim to play on the effect of decorrelation. In order to achieve this goal , companies use the correlation coefficient as an indicator for measuring dependencies existing between (i) the various hedge funds strategies and share index returns and (ii) hedge funds strategies against each other. Otherwise, copulas are a statistic tool to model the dependence in a realistic and less restrictive way, taking better account of the stylized facts in finance. This paper is a practical implementation of the copulas theory to model dependence between different hedge fund strategies and share index returns and between these strategies in relation to each other on a "normal" period and a period during which the market trend is downward. Our approach based on copulas allows us to determine the bivariate VaR level curves and to study extremal dependence between hedge funds strategies and share index returns through the use of some tail dependence measures which can be made into useful portfolio management tools.
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Bibliographic InfoPaper provided by University of Paris West - Nanterre la Défense, EconomiX in its series EconomiX Working Papers with number 2009-19.
Length: 22 pages
Date of creation: 2009
Date of revision:
Hedge fund strategies; share index; dependence; copula; tail dependence; bivariate Value at Risk;
Find related papers by JEL classification:
- C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
- C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
- C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General
- G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
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