Measuring China Stock Market Risk By Copula Functions

The motivation of the research on financial risk is that the underling risk factors cause the loss/return of the financial assets in some unknown conditions. There are many risk exposure which limited the development of financial institutions. In order to forecast and control the risk properly, the researches and the financial institution had developed many methods to measure the risk and the Value at Risk (VaR) is one of the most used ones. VaR has became the standard method which is used to measure the market risk and the definition of it is that the most probably changing value of a financial portfolio during a holding period with the given the confident level. As an important forecast method, VaR computed by Monte Carlo simulation has been widely applied in the risk management. There is a question that VaR is not the coherent measure of risk and the researchers had developed a coherent measure of risk which called Expected Shortfall (ES) and Expected Shortfall could be a complementarity for VaR.Influenced by the progress of times and economics globalization, the relationship between the different financial markets has became more complicated than ever before, which appeared the un-linear correlation and asymmetry. The traditional methods can not meet the demand of financial development any more. People tried to search or design some new theories and methods to follow the step of times progress. The appearance and application of the Copula theory in financial field have made us find a new direction. The Copula functions provide us a new method to measure the dependence structures, which coupled the joint distribution and the marginal distributions together.Using reference from foreign research in the similar field, I will take several Copula functions in this paper to measure the China securities market risk with the Monte Carlo simulation. The empirical work had showed that measuring risk in China securities market by Copula functions has the excellent statistics character as foreign markets. It also made us to believe that it has a great potential of Copula in all fields of Chinese financial markets. The construction of the paper had been designed as follows:Chapter 1, the summarization of the theory in financial risk management, introduced the basic concepts and definitions on financial management which used in the paper. Section 1 defined the concepts of Value at Risk and Expected Shortfall. Section 2 introduced us the theory of Copula functions and some representative Copulas. Section 3 gave us a rude review of dependence measures.