Estimating the Value at Risk of a bank’s portfolio in sovereign bonds using a DCC-Copula model

Jose Gomez-Gonzalez, Daniela Gualtero-Briceño and Luis Melo-Velandia

Working papers from Red Investigadores de Economía

Abstract: Rises in sovereign risk adversely affect banks reducing their profits and increasing their funding costs. Impacts are specially strong on banks holding important positions of government debt in the investment portfolios. This study applies a DCC-Copula model to estimate the VaR for a portfolio composed of 30 sovereign bonds from ten different countries and three different maturities. Results indicate that the model proposed in this study outperforms competing benchmark models under various back-testing criteria. The method here developed is useful for global banks holding a diversified portfolio of sovereign bonds, especially in emerging market countries in which banks mostly invest in public debt.

Keywords: Value at Risk; Banks' market risk; Dynamic copula models; Back-testing (search for similar items in EconPapers)
JEL-codes: C46 C52 C58 G32 (search for similar items in EconPapers)
Pages: 31
Date: 2021-02
New Economics Papers: this item is included in nep-ban and nep-rmg
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Persistent link: https://EconPapers.repec.org/RePEc:rie:riecdt:75

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