Estimating value at risk of portfolio by conditional copula-GARCH method

Jen-Jsung Huang, Kuo-Jung Lee, Hueimei Liang and Wei-Fu Lin

Insurance: Mathematics and Economics, 2009, vol. 45, issue 3, 315-324

Abstract: Copula functions represent a methodology that describes the dependence structure of a multi-dimension random variable and has become one of the most significant new tools to handle risk factors in finance, such as Value-at Risk (VaR), which is probably the most widely used risk measure in financial institutions. Combining copula and the forecast function of the GARCH model, this paper proposes a new method, called conditional copula-GARCH, to compute the VaR of portfolios. This work presents an application of the copula-GARCH model in the estimation of a portfolio's VaR, composed of NASDAQ and TAIEX. The empirical results show that, compared with traditional methods, the copula model captures the VaR more successfully. In addition, the Student-t copula describes the dependence structure of the portfolio return series quite well.

Keywords: Copula; GARCH; VaR (search for similar items in EconPapers)
Date: 2009
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Citations: View citations in EconPapers (46)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:insuma:v:45:y:2009:i:3:p:315-324

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