Local Estimation of Copula Based Value-at-Risk

Eduardo F. L. de Melo () and Beatriz Vaz de Melo Mendes ()
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Eduardo F. L. de Melo: Instituto de Matemática e Estatística, Universidade Estadual do Rio de Janeiro
Beatriz Vaz de Melo Mendes: Instituto de Matemática, Universidade Federal do Rio de Janeiro

Brazilian Review of Finance, 2009, vol. 7, issue 1, 29-50

Abstract: In this paper we propose the local maximum likelihood method for dynamically estimate copula parameters. We study the estimates statistical properties and derive the expression for their asymptotic variance in the case of Gaussian copulas. The local estimates are able to detect temporal changes in the strength of dependence among assets. These dynamics are combined with a GARCH type modeling of each individual asset to estimate the Value- at-Risk. The performance of the proposed estimates is investigated through Monte Carlo simulation experiments. In an application using real data, an out-of-sample test indicated that the new methodology may outperform the constant copula model when it comes to Value-at-Risk estimation.

Keywords: copulas; local maximum likelihood estimation; value-at-risk. (search for similar items in EconPapers)
JEL-codes: C13 C32 C52 (search for similar items in EconPapers)
Date: 2009
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Persistent link: https://EconPapers.repec.org/RePEc:brf:journl:v:7:y:2009:i:1:p:29-50

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