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Estimation of VAR Using Copula and Extreme Value Theory

Multinational Finance Journal, 2008, vol. 12, no. 3/4, pp. 205–218

14 Pages Posted: 15 Jun 2006 Last revised: 19 Oct 2013

Luiz Koodi Hotta

University of Campinas (UNICAMP) - Department of Statistics

Edimilson C. Lucas

Getulio Vargas Foundation (FGV) - Sao Paulo School of Business Administration

Helder P. Palaro

Independent

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Date Written: June 12, 2006

Abstract

This paper proposes a method for estimating the VaR of a portfolio based on copula and extreme value theory. Each return is modeled by ARMAxGARCH models with the joint distribution of innovations modeled by copula. The marginal distributions are modeled by the generalized Pareto distribution in the left tail (large loss) and empirical distribution otherwise. The copula is estimated by an estimator which gives more weight to observations with large loss. The method is applied to a two-asset portfolio and compared to other traditional methods.

Keywords: Conditional Copula, Risk Measures, Value at Risk, Extreme Value Theory

JEL Classification: C215, D81, G10

Suggested Citation

Hotta, Luiz Koodi and Lucas, Edimilson C. and Palaro, Helder P., Estimation of VAR Using Copula and Extreme Value Theory (June 12, 2006). Multinational Finance Journal, 2008, vol. 12, no. 3/4, pp. 205–218. Available at SSRN: https://ssrn.com/abstract=908259 or http://dx.doi.org/10.2139/ssrn.908259

Luiz Hotta

University of Campinas (UNICAMP) - Department of Statistics ( email )

Campinas, São Paulo 13083-859
Brazil

Edimilson Lucas

Getulio Vargas Foundation (FGV) - Sao Paulo School of Business Administration ( email )

Sao Paulo
Brazil

Helder Palaro (Contact Author)

Independent ( email )

Monaco

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