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Estimating value-at-risk using a multivariate copula-based volatility model: Evidence from European banks

Author

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  • Sampid, Marius Galabe
  • Hasim, Haslifah M.

Abstract

This paper proposes a multivariate copula-based volatility model for estimating Value-at-Risk (VaR) in the banking sector of selected European countries by combining dynamic conditional correlation (DCC) multivariate GARCH (M-GARCH) volatility model and copula functions. Non-normality in multivariate models is associated with the joint probability of the univariate models' marginal probabilities –the joint probability of large market movements, referred to as tail dependence. In this paper, we use copula functions to model the tail dependence of large market movements and test the validity of our results by performing back-testing techniques. The results show that the copula-based approach provides better estimates than the common methods currently used and captures VaR reasonably well based on the differences in the numbers of exceptions produced during different observation periods at the same confidence level.

Suggested Citation

  • Sampid, Marius Galabe & Hasim, Haslifah M., 2018. "Estimating value-at-risk using a multivariate copula-based volatility model: Evidence from European banks," International Economics, Elsevier, vol. 156(C), pages 175-192.
    • Handle: RePEc:eee:inteco:v:156:y:2018:i:c:p:175-192
    DOI: 10.1016/j.inteco.2018.03.001
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    Citations

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    Cited by:

    1. Ahmet Akca & Ethem Çanakoğlu, 2021. "Adaptive stochastic risk estimation of firm operating profit," Economia e Politica Industriale: Journal of Industrial and Business Economics, Springer;Associazione Amici di Economia e Politica Industriale, vol. 48(3), pages 463-504, September.
    2. Fahim Afzal & Pan Haiying & Farman Afzal & Asif Mahmood & Amir Ikram, 2021. "Value-at-Risk Analysis for Measuring Stochastic Volatility of Stock Returns: Using GARCH-Based Dynamic Conditional Correlation Model," SAGE Open, , vol. 11(1), pages 21582440211, March.
    3. Liu, Xiaoxing & Shehzad, Khurram & Kocak, Emrah & Zaman, Umer, 2022. "Dynamic correlations and portfolio implications across stock and commodity markets before and during the COVID-19 era: A key role of gold," Resources Policy, Elsevier, vol. 79(C).

    More about this item

    Keywords

    Value-at-risk; Dynamic conditional correlation; GARCH; Copulas; Volatility;
    All these keywords.

    JEL classification:

    • C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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