International Equity Portfolio Risk Modeling: The Case of the NIG Model and Ordinary Copula Functions
Year: 2012 Volume: 62 Issue: 2 Pages: 141-161
Abstract: Financial risk modeling and management are very important and challenging tasks for financial institutions’ quantitative units. Owing to the complex nature of portfolios, and given recent financial market developments, contemporary research is focused on tail modeling and/or dependency modeling. The main objective of this paper is to examine the potential contribution of Lévy-based subordinated models coupled by ordinary elliptical copula functions to the estimation of the distribution pattern of international equity portfolios. The authors observe that the subordinated NIG model coupled with the Student copula function, and in particular its combined estimation version, allows them to get very good estimates of portfolio risk measures.
JEL classification: C53, D53, G17, G24
Keywords: market risk, backtesting, subordinated Lévy model, VaR
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