Risk Measurement and Risk Modelling Using Applications of Vine Copulas"

Type of content
Discussion / Working Papers
Publisher's DOI/URI
Thesis discipline
Degree name
Publisher
University of Canterbury. Department of Economics and Finance
University of Canterbury. Mathematics and Statistics
Journal Title
Journal ISSN
Volume Title
Language
Date
2014
Authors
Allen, D. E.
McAleer, M.
Singh, A. K.
Abstract

This paper features an application of Regular Vine copulas which are a novel and recently developed statistical and mathematical tool which can be applied in the assessment of composite financial risk. Copula-based dependence modelling is a popular tool in financial applications, but is usually applied to pairs of securities. By contrast, Vine copulas provide greater flexibility and permit the modelling of complex dependency patterns using the rich variety of bivariate copulas which may be arranged and analysed in a tree structure to explore multiple dependencies. The paper features the use of Regular Vine copulas in an analysis of the co-dependencies of 10 major European Stock Markets, as represented by individual market indices and the composite STOXX 50 index. The sample runs from 2005 to the end of 2011 to permit an exploration of how correlations change in different economic circumstances using three different sample periods: pre-GFC (Jan 2005- July 2007), GFC (July 2007-Sep 2009), and post-GFC periods (Sep 2009 - Dec 2011). The empirical results suggest that the dependencies change in a complex manner, and are subject to change in different economic circumstances. One of the attractions of this approach to risk modelling is the flexibility in the choice of distributions used to model co-dependencies. The practical application of Regular Vine metrics is demonstrated via an example of the calculation of the VaR of a portfolio made up of the indicesP

Description
Citation
Allen, D. E., McAleer, M., Singh, A. K. (2014) Risk Measurement and Risk Modelling Using Applications of Vine Copulas". University of Canterbury. 29pp..
Keywords
Regular Vine Copulas, Tree structures, Co-dependence modelling, European stock markets
Ngā upoko tukutuku/Māori subject headings
ANZSRC fields of research
Fields of Research::35 - Commerce, management, tourism and services::3502 - Banking, finance and investment::350203 - Financial econometrics
Fields of Research::35 - Commerce, management, tourism and services::3502 - Banking, finance and investment::350208 - Investment and risk management
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