Model risk in the estimation of value-at-risk is a challenging threat for the success of any financial investments. The degree of the model risk increases when the estimation process is constructed with a portfolio in the emerging markets. The proper model should both provide flexible joint distributions by splitting the marginality from the dependencies among the financial assets within the portfolio and also capture the non-linear behaviours and extremes in the returns arising from the special features of the emerging markets. In this paper, we use time-varying copula to estimate the value-at-risk of the portfolio comprised of the Bovespa and the IPC Mexico in equal and constant weights. The performance comparison of the copula model to the EWMA portfolio model made by the Christoffersen back-test shows that the copula model captures the extremes most successfully. The copula model, by estimating the portfolio value-at-risk with the least violation number in the back-tests, provides the investors to allocate the minimum regulatory capital requirement in accordance with the Basel II Accord.
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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number
2711.
Find related papers by JEL classification: C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: General - - - Semiparametric and Nonparametric Methods G1 - Financial Economics - - General Financial Markets C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
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References listed on IDEAS Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
Christoffersen, Peter F, 1998.
"Evaluating Interval Forecasts,"
International Economic Review,
Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(4), pages 841-62, November.
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