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Estimating value at risk of portfolio by conditional copula-GARCH method

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Listed:
  • Huang, Jen-Jsung
  • Lee, Kuo-Jung
  • Liang, Hueimei
  • Lin, Wei-Fu

Abstract

Copula functions represent a methodology that describes the dependence structure of a multi-dimension random variable and has become one of the most significant new tools to handle risk factors in finance, such as Value-at Risk (VaR), which is probably the most widely used risk measure in financial institutions. Combining copula and the forecast function of the GARCH model, this paper proposes a new method, called conditional copula-GARCH, to compute the VaR of portfolios. This work presents an application of the copula-GARCH model in the estimation of a portfolio's VaR, composed of NASDAQ and TAIEX. The empirical results show that, compared with traditional methods, the copula model captures the VaR more successfully. In addition, the Student-t copula describes the dependence structure of the portfolio return series quite well.

Suggested Citation

  • Huang, Jen-Jsung & Lee, Kuo-Jung & Liang, Hueimei & Lin, Wei-Fu, 2009. "Estimating value at risk of portfolio by conditional copula-GARCH method," Insurance: Mathematics and Economics, Elsevier, vol. 45(3), pages 315-324, December.
    • Handle: RePEc:eee:insuma:v:45:y:2009:i:3:p:315-324
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    References listed on IDEAS

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    Keywords

    Copula GARCH VaR;

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