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Title:Modelling asymmetric dependence using copula functions: An application to value-at-risk in the energy sector PDF Logo
Authors:Bastianin, Andrea
Issue Date:2009
Series/Report no.:Nota di lavoro // Fondazione Eni Enrico Mattei: Sustainable Development 24.2009
Abstract:In this paper I have used copula functions to forecast the Value-at-Risk (VaR) of an equally weighted portfolio comprising a small cap stock index and a large cap stock index for the oil and gas industry. The following empirical questions have been analyzed: (i) are there nonnormalities in the marginals? (ii) are there nonnormalities in the dependence structure? (iii) is it worth modelling these nonnormalities in risk- management applications? (iv) do complicated models perform better than simple models? As for questions (i) and (ii) I have shown that the data do deviate from the null of normality at the univariate, as well as at the multivariate level. When considering the dependence structure of the data I have found that asymmetries show up in their unconditional distribution, as well as in their unconditional copula. The VaR forecasting exercise has shown that models based on Normal marginals and/or with symmetric dependence structure fail to deliver accurate VaR forecasts. These findings confirm the importance of nonnormalities and asymmetries both in-sample and out-of-sample.
Subjects:Copula functions
Forecasting
Value-At-Risk
JEL:C32
C52
C53
G17
Q43
Document Type:Working Paper
Appears in Collections:FEEM Working Papers, Fondazione Eni Enrico Mattei

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