Study Of Correlation In International Diversification Based On Pair Copula-GARCH With Vine Structure

The portfolio with low risk and high returns is the burning desire for every investor.But just like we can not sell the cow and drink the milk,it's hard to have both of them.In investing activities,every investor makes risk management to seek a balance point between risk and return.Diversification theory is an important part of financial risk management.The saying "Do not put all your eggs in one basket " is an accurate description of the characteristics of diversification theory,and expresses the importance of investment in different types of assets or securities.Compared with a single investment security,an important benefit of diversification is to reduce risk without affecting returns.In 1950s,Markowitz proposed the famous Portfolio Theory to measure the benefits and risks with the mean and variance.The Portfolio Theory selected a portfolio that has minimum variance with a certain returns(or max return with a certain variance),under the assumption of risk-averse investors,and laid a solid theoretical foundation in diversified investment strategy,making the investors realize the benefits of diversification.With the economic globalization,asset allocations among different countries and regions have become increasingly prevalent.With the use of international diversification,the markets can effectively resolve the non-systematic risk.And even in the situation of the assets or equity investments are large enough,the risk can be almost completely circumvented.The research contents of this thesis are as follows:Chapter 1 describes the research background and significance of the topic and the relevant literatures,and also makes a review of the current research literatures of Pair Copula and the relevant portfolio analysis.And then,it summarizes the important difficulties in the study,gives the research ideas and the basic framework of this thesis,and describes the research methods and innovation of this thesis.Chapter 2 and Chapter 3 make a description of the relevant theories.These two chapters give a review of the two basic theories:GARCH model and Copula theory,and make a comparison of different models.Finally,they derive from the theoretical feasibility of this model and determine the direction of modeling.Chapter 4 is the part about the GARCH-Pair Copula model construction and parameter estimation.Based on the previous review of literature,this chapter makes an empirical analysis on how to build the model and how to estimate the parameters,and gives approximate model building steps.Chapter 5 gives the VaR based on the model in this thesis with the GARCH Pair Copula,completing the transition from the correlation coefficient of Copula to the VaR,which the investors really care.Chapter 6 is about the empirical analysis.In this thesis,we chose several typical samples in developing countries and emerging markets,and collect the historical data of each country's money returns with U.S dollars.After making ADF test and ARCH effect test,according to the two steps of marginal distribution and Pair Copula modeling,we build a new model and make parameter estimation.Finally,based on the results of the degree of freedom,we make a conclusion that the importance of emerging markets into the portfolio will reduce the risk.We also make an analysis through the Monte Carlo simulation VaR measure with different weights of each asset.Chapter 7 draws the conclusions.This chapter concludes that the emerging market in the international portfolio is an effective way to reduce risk.It also points out the future research directions.