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Estimating the Value at Risk of a bank’s portfolio in sovereign bonds using a DCC-Copula model

Author

Listed:
  • Gomez-Gonzalez, Jose Eduardo
  • Gualtero-Briceño, Daniela
  • Melo-Velandia, Luis Fernando

Abstract

Rises in sovereign risk adversely affect banks reducing their profits and increasing their funding costs. Impacts are specially strong on banks holding important positions of government debt in the investment portfolios. This study applies a DCC-Copula model to estimate the VaR for a portfolio composed of 30 sovereign bonds from ten different countries and three different maturities. Results indicate that the model proposed in this study outperforms competing benchmark models under various back-testing criteria. The method here developed is useful for global banks holding a diversified portfolio of sovereign bonds, especially in emerging market countries in which banks mostly invest in public debt.

Suggested Citation

  • Gomez-Gonzalez, Jose Eduardo & Gualtero-Briceño, Daniela & Melo-Velandia, Luis Fernando, 2021. "Estimating the Value at Risk of a bank’s portfolio in sovereign bonds using a DCC-Copula model," Working papers 75, Red Investigadores de Economía.
    • Handle: RePEc:rie:riecdt:75
    as

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    References listed on IDEAS

    as
    1. Aloui, Riadh & Ben Aïssa, Mohamed Safouane & Nguyen, Duc Khuong, 2013. "Conditional dependence structure between oil prices and exchange rates: A copula-GARCH approach," Journal of International Money and Finance, Elsevier, vol. 32(C), pages 719-738.
    2. repec:cii:cepiei:2013-q1-133-6 is not listed on IDEAS
    3. Theo Berger, 2013. "Forecasting value-at-risk using time varying copulas and EVT return distributions," International Economics, CEPII research center, issue 133, pages 93-106.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Value at Risk; Banks' market risk; Dynamic copula models; Back-testing;
    All these keywords.

    JEL classification:

    • C46 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Specific Distributions
    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • 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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