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Vulnerability of Copula-VaR to Misspecification of Margins and Dependence Structure

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Algorithms from and for Nature and Life

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Abstract

Copula functions as tools for modeling multivariate distributions are well known in theory of statistics and over the last decade have been gathering more and more popularity also in the field of finance. A Copula-based model of multivariate distribution includes both dependence structure and marginal distributions in such a way that the first may be analyzed separately from the later. Its main advantage is an elasticity allowing to merge margins of one type with a copula function of another one, or even bound margins of various types by a common copula into a single multivariate distribution. In this article copula functions are used to estimate Value at Risk (VaR). The goal is to investigate how misspecification of marginal distributions and dependence structure affects VaR. As dependence structure normal and student-t copula are considered. The analysis is based on simulation studies.

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Notes

  1. 1.

    Tool: Matlab ver. 7.9.0.529 (2009b).

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Authors and Affiliations

  1. Department of Financial Investments and Risk Management, Wroclaw University of Economics, ul. Komandorska 118/120, Wroclaw, Poland

    Katarzyna Kuziak

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  1. Katarzyna Kuziak
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Correspondence to Katarzyna Kuziak .

Editor information

Editors and Affiliations

  1. University of Essex Department of Mathematical Sciences, Colchester, United Kingdom

    Berthold Lausen

  2. Ghent University Department of Marketing, Ghent, Belgium

    Dirk Van den Poel

  3. University of Marburg Databionics, FB 12, Marburg, Germany

    Alfred Ultsch

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Kuziak, K. (2013). Vulnerability of Copula-VaR to Misspecification of Margins and Dependence Structure. In: Lausen, B., Van den Poel, D., Ultsch, A. (eds) Algorithms from and for Nature and Life. Studies in Classification, Data Analysis, and Knowledge Organization. Springer, Cham. https://doi.org/10.1007/978-3-319-00035-0_39

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