Value at Risk – Matlab Application of Copulas on US and Indian Markets
18 Pages Posted: 7 Apr 2010
Date Written: April 6, 2010
Diversification globally has become a style more than a strategy and the need of the hour boils down to the efficient investment identification, better diversification of the risk, and better risk – adjusted return. One of the ways of such diversification is the investment in the indices, which has a portfolio of varied securities, globally. Such an investment immediately calls for a better exposure measurement to analyse the various investment parameters such as the portfolio variance, the Value at Risk, the associated return, the End Tail Loss and so on. This paper measures one such parameter, the Value at Risk (VaR) using the bivariate Gaussian Copula distribution implemented in MATLAB for the Dow-Jones index and the National Stock Exchange index. From a business point of view, with huge investments being made in India by Foreign Institutional Investors (FIIs) and vice-versa, this study holds much relevance with the risk identification and its mitigation. Retail investors are the least ones to be informed about the markets and this might serve as a platform for them to study their investment risk as a measure of VaR. For an academician the correlation, its dependence on the on copulas and its study would always be beneficial for risk management.
Keywords: Value at Risk, Stock Index, Copula
JEL Classification: G11, G21, R15
Suggested Citation: Suggested Citation