Modelling Asymmetric Dependence Using Copula Functions: An application to Value-at-Risk in the Energy Sector
AbstractIn 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 InfoPaper provided by Fondazione Eni Enrico Mattei in its series Working Papers with number 2009.24.
Date of creation: Apr 2009
Date of revision:
Copula functions; Forecasting; Value-At-Risk;
Find related papers by JEL classification:
- C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
- C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
- C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
- G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation
- Q43 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy and the Macroeconomy
This paper has been announced in the following NEP Reports:
- NEP-ALL-2009-05-23 (All new papers)
- NEP-ENE-2009-05-23 (Energy Economics)
- NEP-RMG-2009-05-23 (Risk Management)
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- Westner, Günther & Madlener, Reinhard, 2012.
"Investment in new power generation under uncertainty: Benefits of CHP vs. condensing plants in a copula-based analysis,"
Elsevier, vol. 34(1), pages 31-44.
- 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 12/2010, E.ON Energy Research Center, Future Energy Consumer Needs and Behavior (FCN).
- Wen, Xiaoqian & Wei, Yu & Huang, Dengshi, 2012. "Measuring contagion between energy market and stock market during financial crisis: A copula approach," Energy Economics, Elsevier, vol. 34(5), pages 1435-1446.
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