Using dynamic copulae for modeling dependency in currency denominations of a diversified world stock index

Katja Ignatieva, Eckhard Platen, Renata Rendek

Research output: Contribution to journalArticlepeer-review

4 Citations (Scopus)

Abstract

The aim of this paper is to model the dependency among log-returns when security account prices are expressed in units of a well diversified world stock index. The dependency in log-returns of currency denominations of the index is modeled using time-varying copulae, aiming to identify the best fitting copula family. The Student-t copula turns generally out to be superior to e.g. the Gaussian copula, where the dependence structure relates to the multivariate normal distribution. It is shown that merely changing the distributional assumption for the log-returns of the marginals from normal to Student-t leads to a significantly better fit. The Student-5 copula with Student-t marginals is able to better capture dependent extreme values than the other models considered. Furthermore, the paper applies copulae to the estimation of the Value-at-Risk and the expected shortfall of a portfolio constructed of savings accounts of different currencies. The proposed copula-based approach allows to split market risk into general and specific market risk, as defined in regulatory documents. The paper demonstrates that the approach performs clearly better than the RiskMetrics approach, a widely used methodology for Value-at-Risk estimation.
Original languageEnglish
Pages (from-to)425-452
Number of pages28
JournalJournal of Statistical Theory and Practice
Volume5
Issue number3
DOIs
Publication statusPublished - 2011

Keywords

  • Diversified world stock index
  • Expected shortfall
  • Student-t distribution
  • Time-varying copula
  • Value-at-Risk

Fingerprint Dive into the research topics of 'Using dynamic copulae for modeling dependency in currency denominations of a diversified world stock index'. Together they form a unique fingerprint.

Cite this