Stress-Testing for Portfolios of Commodity Futures with Extreme Value Theory and Copula Functions

Pierre-Antoine Mudry () and Florentina Paraschiv ()
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Pierre-Antoine Mudry: University of St. Gallen
Florentina Paraschiv: University of St. Gallen

A chapter in Computational Management Science, 2016, pp 17-22 from Springer

Abstract: Abstract In this paper, we performed a stress-testing for a portfolio of commodity futures, which mimics the dynamics of the DJ-UBS index. We identified extreme events that impacted commodity prices over time, and looked at correlation structures in a dynamic way, with copula functions. In line with Basel III financial regulations, we derived baseline, historical, and hybrid scenarios and discussed their advantages and shortfalls. We found that the financialization of commodity markets led to an increase in correlations and in the probability for joint extremes. However, we identified structural breaks in commodity markets that temporarily led to a breakdown of expected statistical patterns and of traditional dependence structures among commodities. This fact shows the need for forward-looking stress testing techniques, like hybrid and hypothetical scenarios, as encouraged by financial regulators.

Keywords: Financial Crisis; Copula Function; Extreme Value Theory; Generalize Pareto; Commodity Future (search for similar items in EconPapers)
Date: 2016
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Persistent link: https://EconPapers.repec.org/RePEc:spr:lnechp:978-3-319-20430-7_3

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DOI: 10.1007/978-3-319-20430-7_3

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