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Journal of Statistical Theory and Practice

, Volume 5, Issue 3, pp 425–452 | Cite as

Using Dynamic Copulae for Modeling Dependency in Currency Denominations of a Diversified World Stock Index

  • Katja Ignatieva
  • Eckhard Platen
  • Renata Rendek
Article

Abstract

The aim of this paper is to model the dependency among log-returns when security account prices are expressed in units of a well diversified world stock index. The dependency in log-returns of currency denominations of the index is modeled using time-varying copulae, aiming to identify the best fitting copula family. The Student-t copula turns generally out to be superior to e.g. the Gaussian copula, where the dependence structure relates to the multivariate normal distribution. It is shown that merely changing the distributional assumption for the log-returns of the marginals from normal to Student-t leads to a significantly better fit. The Student-t copula with Student-t marginals is able to better capture dependent extreme values than the other models considered. Furthermore, the paper applies copulae to the estimation of the Value-at-Risk and the expected shortfall of a portfolio constructed of savings accounts of different currencies. The proposed copula-based approach allows to split market risk into general and specific market risk, as defined in regulatory documents. The paper demonstrates that the approach performs clearly better than the RiskMetrics approach, a widely used methodology for Value-at-Risk estimation.

AMS Subject Classification

62F03 62P20 

Key-words

Diversified world stock index Student-t distribution Time-varying copula Value-at-Risk Expected shortfall 

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Copyright information

© Grace Scientific Publishing 2011

Authors and Affiliations

  • Katja Ignatieva
    • 1
    • 2
  • Eckhard Platen
    • 3
  • Renata Rendek
    • 3
  1. 1.Macquarie University SydneyAustralia
  2. 2.Goethe University FrankfurtGermany
  3. 3.University of TechnologySydneyAustralia

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