Risk Estimation in Exchange Rate Markets Based on Stochastic Copula Approach

Erol Terzi, Emre Yildirim, Bünyamin Saribacak, Mehmet Ali Cengiz and Sundarapandian Vaidyanathan

Discrete Dynamics in Nature and Society, 2022, vol. 2022, 1-8

Abstract: Risk estimation is of great importance in financial risk management. In this study, the risk estimation of the exchange rate portfolio is performed via the stochastic copula approach. This model-based latent process has a parameter that changes over time and thus can model the dependency structure between variables in a comprehensive and dynamic way. First, the marginals of the returns are handled with ARMA-GARCH-type models. Then, the dependency between variables is modeled via the stochastic copula approach. Finally, risk estimates are carried out at 95% and 99% confidence level for the foreign exchange portfolios. It is found that the proposed risk estimation model based on the stochastic copula approach outperforms both classical methods and static copula models.

Date: 2022
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Persistent link: https://EconPapers.repec.org/RePEc:hin:jnddns:8467691

DOI: 10.1155/2022/8467691

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