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Modelling Asymmetric Dependence Using Copula Functions: An application to Value-at-Risk in the Energy Sector

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  • Andrea Bastianin

    (Fondazione Eni Enrico Mattei)

Abstract

In this paper I have used copula functions to forecast the Value-at-Risk (VaR) of an equally weighted portfolio comprising a small cap stock index and a large cap stock index for the oil and gas industry. The following empirical questions have been analyzed: (i) are there nonnormalities in the marginals? (ii) are there nonnormalities in the dependence structure? (iii) is it worth modelling these nonnormalities in risk- management applications? (iv) do complicated models perform better than simple models? As for questions (i) and (ii) I have shown that the data do deviate from the null of normality at the univariate, as well as at the multivariate level. When considering the dependence structure of the data I have found that asymmetries show up in their unconditional distribution, as well as in their unconditional copula. The VaR forecasting exercise has shown that models based on Normal marginals and/or with symmetric dependence structure fail to deliver accurate VaR forecasts. These findings confirm the importance of nonnormalities and asymmetries both in-sample and out-of-sample.

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Bibliographic Info

Paper provided by Fondazione Eni Enrico Mattei in its series Working Papers with number 2009.24.

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Date of creation: Apr 2009
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Handle: RePEc:fem:femwpa:2009.24

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Keywords: Copula functions; Forecasting; Value-At-Risk;

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Cited by:
  1. Zhu, Hui-Ming & Li, Rong & Li, Sufang, 2014. "Modelling dynamic dependence between crude oil prices and Asia-Pacific stock market returns," International Review of Economics & Finance, Elsevier, Elsevier, vol. 29(C), pages 208-223.
  2. Westner, Günther & Madlener, Reinhard, 2010. "Investment in New Power Generation under Uncertainty: Benefits of CHP vs Condensing Plants in a Copula-Based Analysis," FCN Working Papers, E.ON Energy Research Center, Future Energy Consumer Needs and Behavior (FCN) 12/2010, E.ON Energy Research Center, Future Energy Consumer Needs and Behavior (FCN).
  3. Wen, Xiaoqian & Wei, Yu & Huang, Dengshi, 2012. "Measuring contagion between energy market and stock market during financial crisis: A copula approach," Energy Economics, Elsevier, Elsevier, vol. 34(5), pages 1435-1446.

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