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Risk factors, Copula dependence and risk sensitivity of a large portfolio

Author

Listed:
  • Catherine Bruneau

    (Centre d'Economie de la Sorbonne)

  • Alexis Flageollet

    (Natixis Asset Management)

  • Zhun Peng

    (EPEE - Université d'Evry)

Abstract

In this paper, we propose a flexible tool to estimate the risk sensitivity of a high-dimensional portfolio composed of different classes of assets, especially in extreme risk circumstances. We build a so-called Cvine Risk Factors Model (CRFM), which is a non-linear version of a risk factor model in a copula framework. Our tool allows us to decompose the risk of any asset and any portfolio into specific risk directions depending on the context. As an application, we compare the sensitivity of different types of portfolios to extreme risks. We also give an example of a view-type analysis as usually performed by portfolio managers who examine what their portfolio becomes under specific circumstances: here we examine the case of a low inflation context. These analyses allow us to detect changes in the diversification opportunities over time

Suggested Citation

  • Catherine Bruneau & Alexis Flageollet & Zhun Peng, 2015. "Risk factors, Copula dependence and risk sensitivity of a large portfolio," Documents de travail du Centre d'Economie de la Sorbonne 15040, Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne.
    • Handle: RePEc:mse:cesdoc:15040
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    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation
    • 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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