EconPapers    
Economics at your fingertips  
 

Risk Measurement and Risk Modelling Using Applications of Vine Copulas

David Allen (), Michael McAleer and Abhay K. Singh ()
Additional contact information
Abhay K. Singh: School of Business and Law, Edith Cowan University, Joondalup, WA 6027, Australia

Sustainability, 2017, vol. 9, issue 10, 1-34

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 2013 to permit an exploration of how correlations change indifferent economic circumstances using three different sample periods: pre-GFC (January 2005–July 2007), GFC (July 2007– September 2009), and post-GFC periods (September 2009–December 2013). 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 indices.

Keywords: regular vine copulas; tree structures; co-dependence modelling; European stock markets (search for similar items in EconPapers)
JEL-codes: Q Q0 Q2 Q3 Q5 Q56 O13 (search for similar items in EconPapers)
Date: 2017
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4) Track citations by RSS feed

Downloads: (external link)
https://www.mdpi.com/2071-1050/9/10/1762/pdf (application/pdf)
https://www.mdpi.com/2071-1050/9/10/1762/ (text/html)

Related works:
Working Paper: Risk Measurement and Risk Modelling Using Applications of Vine Copulas (2014) Downloads
Working Paper: Risk Measurement and Risk Modelling using Applications of Vine Copulas (2014) Downloads
Working Paper: Risk Measurement and risk modelling using applications of Vine Copulas (2014) Downloads
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:gam:jsusta:v:9:y:2017:i:10:p:1762-:d:113713

Access Statistics for this article

Sustainability is currently edited by Prof. Dr. Marc A. Rosen

More articles in Sustainability from MDPI, Open Access Journal
Bibliographic data for series maintained by XML Conversion Team ().

 
Page updated 2019-11-11
Handle: RePEc:gam:jsusta:v:9:y:2017:i:10:p:1762-:d:113713