The Study Of Financial Risk Measurement Based On Copula Function

With the fast development of financial globalization, the risks financial market faced become more complicated and diversified than ever before. Financial risks display non-linear, non-symmetric and tail dependence modes. The linear correlation coefficient based on traditional assumption of normal distribution has been no longer suitable to describe the dependent patterns of financial markets. Copula function is a good tool to describe dependence structure, which can measure both dependence modes and extents of financial market. The main points of this dissertation are exploring the applications of Copula function systematically in a variety of financial risk measurements from the perspective of the application.The dissertation reviews the research status in the financial risk measurements of Copula function all over the world, points out Copula function's value and deeply analyzes the dependent indexes concluded by the Copula function. The focus is applications of the Copula function about measurements of financial market risk, credit risk, operational risk, integrated risk and test of financial crisis contagion.During the empirical study on market risk, I choose non-parametric kernel density method based on the idea of maximum likelihood to estimate Copula functions' parameters, and tested the method by analyzing the dependent structure between Shanghai and Shenzhen stock markets. The empirical result shows that there exists a high extent of dependence and Frank Copula dependence mode between the two markets. This conclusion coincided to the real status of China stock market. Copula function is superior to traditional methods in the description of dependence. Not only can it measure the extent, but also can describe the pattern of dependence. On credit risk, the aim is to estimate the parameters of two-parameter Copula function. The method used in the article is applying Copula theory for joint probability transfer matrix in the Credit Metrics model. Four-bond portfolios have been used to do examples, and got the credit VaR based on the Copula theory. The advantages of this approach are simple and easy to operate, which can be more accurate to measure credit risk under the premise of perfect credit rating system. Finally, a test was done for financial crisis contagion about the "BRICs" with Copula methods under the current United States financial crisis. By comparing the extent and mode of dependence during pre-and post-crisis periods, points out that the Brazil is the most infected one among four countries, and China is the true "Bric", there are no obvious signs to reflect infection in China. This result is meaningful. The results are related to the degree of openness of capital markets, economic growth patterns and other factors by further analysis.