Estimation of risk in a portfolio of assets

This paper introduces the use of extreme value theory (EVT) and copula for the estimation of value at risk (VaR) for a three asset portfolio representative of the Colombian market. Returns on risk factors are adjusted by ARMA GARCH models and innovations for each of them are modeled by Pareto’s gene...

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Bibliographic Details
Main Authors:	Díaz, Luis Guillermo, Maldonado, Diana A, Salinas, Sandra Milena
Format:	Online
Language:	spa
Published:	Universidad Pedagógica y Tecnológica de Colombia 2013
Subjects:	extreme value theory copula value at risk dependence returns teoría de valor extremo cópulas valor en riesgo dependencia retornos.
Online Access:	https://revistas.uptc.edu.co/index.php/cenes/article/view/48

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Summary:	This paper introduces the use of extreme value theory (EVT) and copula for the estimation of value at risk (VaR) for a three asset portfolio representative of the Colombian market. Returns on risk factors are adjusted by ARMA GARCH models and innovations for each of them are modeled by Pareto’s generalized distribution in order to estimate one-day volatility. Copulas are built on the assumption that innovations follow an empirical marginal distribution so as to represent the dependence structure among risk factors. Performance tests for a series of three month VaR estimations show that modeling volatility and dependence through the use of these theories result more appropriate than those based on normality assumptions.