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The use of copula functions for modeling the risk of investment in shares traded on world stock exchanges

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  • Domino, Krzysztof
  • Błachowicz, Tomasz

Abstract

In this paper the two dimensional model of the investment in shares is presented. The shares prices from five different world stock exchanges (New York, London, Frankfurt, Honk Kong, and Sydney) are examined. The copula functions are used to model the risk of investment. The Hurst threshold exponent derived from the local Detrended Fluctuation Analysis is used to determine the safe investment portfolios with no extreme drops in shares prices. The most important result states that the threshold value is not universal for different markets, however, it is influenced by the subsequent level of market freedom. It was shown, that the level, relatively larger in US, UK, and Australia than in Germany and China, affects the Hurst exponent threshold value.

Suggested Citation

  • Domino, Krzysztof & Błachowicz, Tomasz, 2015. "The use of copula functions for modeling the risk of investment in shares traded on world stock exchanges," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 424(C), pages 142-151.
    • Handle: RePEc:eee:phsmap:v:424:y:2015:i:c:p:142-151
    DOI: 10.1016/j.physa.2015.01.019
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    Cited by:

    1. Domino, Krzysztof, 2020. "Multivariate cumulants in outlier detection for financial data analysis," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 558(C).
    2. Lv, J. & Li, Y.P. & Huang, G.H. & Ding, Y.K. & Li, X. & Li, Y., 2022. "Planning energy economy and eco-environment nexus system under uncertainty: A copula-based stochastic multi-level programming method," Applied Energy, Elsevier, vol. 312(C).
    3. Krzysztof Domino, 2016. "The use of the multi-cumulant tensor analysis for the algorithmic optimisation of investment portfolios," Papers 1605.09181, arXiv.org, revised Aug 2016.
    4. Aldin Ardian & Mustafa Kumral, 2021. "Enhancing mine risk assessment through more accurate reproduction of correlations and interactions between uncertain variables," Mineral Economics, Springer;Raw Materials Group (RMG);Luleå University of Technology, vol. 34(3), pages 411-425, October.
    5. Cerqueti, Roy & Giacalone, Massimiliano & Panarello, Demetrio, 2019. "A Generalized Error Distribution Copula-based method for portfolios risk assessment," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 524(C), pages 687-695.

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