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2014•Journal of Liaoning UniversityRequires access

Analysis of Portfolio VaR by Pair Copula Function

Liu Kun-lu

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Abstract

We propose a pair copula-GARCH-VaR model to analyze the risk of portfolio of financial assets. GJR-GARCH model is used to estimate the distribution of individual assets,with the pair copula function to describe the dependence structure of different pairs of assets in a portfolio,and then calculate the VaR of the portfolio through Monte Carlo simulation method. In the empirical analysis,taking four stocks constitute the portfolio,calculate the risk value with the model structured,and compare the traditional n-dimensional copula method with the pair copula method,finally,we confirmed the pair copula approach has greater flexibility and accuracy.

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What this paper is about

We propose a pair copula-GARCH-VaR model to analyze the risk of portfolio of financial assets. GJR-GARCH model is used to estimate the distribution of individual assets,with the pair copula function to describe the dependence structure of different pairs of assets in a portfolio,and then calculate the VaR of the portfolio through Monte Carlo simulation method. In the empirical analysis,taking four stocks constitute the portfolio,calculate the risk value with the model structured,and compare the traditional n-dimensional copula method with the pair copula method,finally,we confirmed the pair copula approach has greater flexibility and accuracy.

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Available abstract

We propose a pair copula-GARCH-VaR model to analyze the risk of portfolio of financial assets. GJR-GARCH model is used to estimate the distribution of individual assets,with the pair copula function to describe the dependence structure of different pairs of assets in a portfolio,and then calculate the VaR of the portfolio through Monte Carlo simulation method. In the empirical analysis,taking four stocks constitute the portfolio,calculate the risk value with the model structured,and compare the traditional n-dimensional copula method with the pair copula method,finally,we confirmed the pair copula approach has greater flexibility and accuracy.

Key concepts: Copula (linguistics), Portfolio, Econometrics, Value at risk, Autoregressive conditional heteroskedasticity, Portfolio optimization, Economics, Monte Carlo method

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