An Analysis On The Portfolio Risk Of Shanghai And Shenzhen Stock Markets Based On The Copula-VaR Method

In recent years, with the development of Information&Technology, the steps of theglobalization process is becoming more and more quickly. Economic globalization makesthe connection between countries and markets more closely, the effects caused byfluctuations of the single market can easily exports to the other countries which are underthe same economic environment. The stock market as the most important capital market toa country, whose importance is self-evident, because it supports a country’s economicdevelopment and controls the country’s economic lifeline. Therefore, it is of vitalimportance to research the changing of the stock market’s risk and prevent the adverseimpact to the economic construction of a country.In the theory section,I introduce the definition and classification of financial riskfirstly,and VaR is becoming a mainstream risk measurement all over the world because ofits easily being understood, operated and being able to quantify risk and so on. Even if theVaR method has these advantages, but it also with its own deficiencies at the same time.Based on that I introduce the Copula-VaR method to analyze the VaR of the stock market.Secondly, introduce the theory of the Copula and characteristics of different types ofCopula functions in detail.Because using copula measure the risk of the portfolio risk hasits own features,such as the return of the assets are not necessarily obey the normaldistribution hypothesis, and it can better fit the joint distribution between the assets and itcan also eliminate the unreasonable risk measurement caused by the nonlinear correlationbetween assets and so on. So the Copula-VaR method can obtain more accurate VaR of theportfolio.In the empirical section, I choose Shanghai composite index and The Shenzhencomponent index of our country for this paper. According to the sample data’s feature of thejoint density function, I choose the tail symmetry characteristics of binary t-Copulafunction as the distribution function of Shanghai composite index and Shenzhen component index. Taking the advantage of the partial derivatives of the copula function obey theU[0,1],then I make use of the Montecarlo simulation method work out the VaR underdifferent confidence level. Finally, by changing the weight of Shanghai composite indexand Shenzhen component index in the investment portfolio we can get a set of VaR value,then we can draw a curve according to the result. With we increase the number ofsimulation, we can obtained the approximate linear about proportion of the investment andportfolio VaR. The linear’s slope is the changing portfolio VaR caused by the unitpercentage change in the Shanghai composite index, it is also the conclusion of the paper.The Copula method,developed recently, used by this paper is a accurate method ofmeasuring correlation, it is not only applied to the stock market, it can also apply to othercapital market, in addition, this method can solve multivariate correlation.