Risk Management Of China QDⅡ Products Based On DCC-Copula

Since the QDⅡ policy was promulgated in2006, the returns of QDⅡ products hasbeen falling far behind that of overseas market. In addition to the badly globaleconomic environment, the main reason for the dismal performance of QDⅡ productsis the non-international allocation of assets, as the product managers have allocatedlarge amount of capital in domenstic stocks listed in HongKong or overseas. It willhave practical significance on the development of China’s QDⅡ products that adoptCVaR to measure the risk of QDⅡ products and analyse the risk of China QDⅡproducts from the perspective of portfolio optimization.As a coherent measure of risk, CVaR has been widely used to optimize portfoliosand measure the risk. CVaR is greatly affected by the tail distribution of risk factors,then the paper modeled tail distributions of the returns with EVT method in order toget a more accurate measurement of CVaR of the portfolio. The multivariatedistribution function based on Copula can effectively solve the problems resultingfrom the assumption that the portfolio returns follows a multivariate normaldistribution, and describe the characters of the distribution of market returns moreaccurately. But the static Copula models assume the correlation between the assets isunchanged, which is obviously gainst the truth. Then we adopt DCC method which isproposed by Engle in2002, let the correlation coefficient of Gaussian Copula and tCopula be dynamic process, capture the inner-dependence structure between theinnovations, and then constructs the multivariate distribution of portfolio returns.Then, combining Monte Carlo，Mean-CVaR is used to optimize the portfolio and riskmanagement. Finally, an empirical study of four Indexes from MSCI Company isperformed.Empirical study indicates that: while compared with DCC Copula method, thestatic Copula models assuming the correlation between the assets is unchanged haveoverestimated the risk. CVaR value calculated by DCC t Copula method is smallerthan the one calculated via DCC Gaussian Copula method. To the risk-averseinvestors, a large proportion of the assets should be allocated on the developed market,which can be configured to45%. Accordingly, to optimize the investment portfolio,the managers of QDⅡ products should decrease the proportion of the investment inthe developed market and emerging market, while more money should be invested in Chinese A shares and the overseas listed China stocks. In conclusion, the managers ofQDⅡ products should follow a strategy that the allocation of assets should be a"top-down" process, and the investment strategy should be "passive", supplementedby stock selection strategy.