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Copula Function And Extreme Value Theory Applied In Measuring Financial Risks

Posted on:2011-01-20Degree:MasterType:Thesis
Country:ChinaCandidate:Y Y CuiFull Text:PDF
GTID:2189360308469658Subject:Probability theory and mathematical statistics
Abstract/Summary:PDF Full Text Request
The world financial crisis which broke out in recent years has caused a great concern to financial risk. People are seeking methods to improve financial risk measurement model. This study improved traditional risk measure by applying Extreme Value Theory and Copula functions. The research started from discussing VaR methods and its advantages and disadvantages, and then introduced CVaR with consistent characteristics as a complement of VaR. While copula functions are introduced into the calculation of portfolio's VaR and CVaR, market factors no longer depend on the assumption of traditional multivariate distribution, thus, the marginal distribution of asset returns can be a flexible structure. Generally speaking, Crisis often happens when people overlook or fail to accurately capture the tail characteristics of financial gains, consequently, the extreme value theory is introduced to characterize the tail characteristics of each return, and TARCH-EVT marginal distribution models are built. The article selected a China's open-ended fund to conduct an empirical study:measured the risks of this fund; then carried out backtesting in order to choose the optimal model; established the mean-CVaR optimization model for the Fund. Results showed that:TARCH-EVT model fit better than GARCH model when described rate of return on each asset; When apply Copula methods to measure portfolio risk, the choice of marginal distribution function is far more important than the choice of Copula function; After optimizing portfolio's return which is simulated by TARCH-EVT-Copula model, the CVaR can be reduced significantly, so this model is significative to risk mangers to avoid financial risks.
Keywords/Search Tags:Copula Functions, Extreme Value Theory, Financial Risks, CVaR, Backtesting
PDF Full Text Request
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