In this paper I have used copula functions to forecast the Value-at-Risk (VaR) of an equally weighted portfolio comprising a small cap stock index and a large cap stock index for the oil and gas industry. The following empirical questions have been analyzed: (i) are there nonnormalities in the marginals? (ii) are there nonnormalities in the dependence structure? (iii) is it worth modelling these nonnormalities in risk- management applications? (iv) do complicated models perform better than simple models? As for questions (i) and (ii) I have shown that the data do deviate from the null of normality at the univariate, as well as at the multivariate level. When considering the dependence structure of the data I have found that asymmetries show up in their unconditional distribution, as well as in their unconditional copula. The VaR forecasting exercise has shown that models based on Normal marginals and/or with symmetric dependence structure fail to deliver accurate VaR forecasts. These findings confirm the importance of nonnormalities and asymmetries both in-sample and out-of-sample.

Modelling Asymmetric Dependence Using Copula Functions : An application to Value-at-Risk in the Energy Sector / A. Bastianin. - Milano : Fondazione Eni Enrico Mattei, 2009.

Modelling Asymmetric Dependence Using Copula Functions : An application to Value-at-Risk in the Energy Sector

A. Bastianin
Primo
2009

Abstract

In this paper I have used copula functions to forecast the Value-at-Risk (VaR) of an equally weighted portfolio comprising a small cap stock index and a large cap stock index for the oil and gas industry. The following empirical questions have been analyzed: (i) are there nonnormalities in the marginals? (ii) are there nonnormalities in the dependence structure? (iii) is it worth modelling these nonnormalities in risk- management applications? (iv) do complicated models perform better than simple models? As for questions (i) and (ii) I have shown that the data do deviate from the null of normality at the univariate, as well as at the multivariate level. When considering the dependence structure of the data I have found that asymmetries show up in their unconditional distribution, as well as in their unconditional copula. The VaR forecasting exercise has shown that models based on Normal marginals and/or with symmetric dependence structure fail to deliver accurate VaR forecasts. These findings confirm the importance of nonnormalities and asymmetries both in-sample and out-of-sample.
2009
Fondazione Eni Enrico Mattei
http://www.feem.it/NR/rdonlyres/74CA6E78-4971-46F2-A7A8-180941D9CA44/2854/2409.pdf
Working Paper
Modelling Asymmetric Dependence Using Copula Functions : An application to Value-at-Risk in the Energy Sector / A. Bastianin. - Milano : Fondazione Eni Enrico Mattei, 2009.
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Utilizza questo identificativo per citare o creare un link a questo documento: https://hdl.handle.net/2434/65582
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