Efficiency gains in value-at-risk and expected shortfall estimation by using copulas and full maximum likelihood
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Title: | Efficiency gains in value-at-risk and expected shortfall estimation by using copulas and full maximum likelihood |
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Authors: | Castillo, Brenda | León Valle, Ángel M. | Mora-López, Juan |
Research Group/s: | Economía Laboral y Econometría (ELYE) | Finanzas de Mercado y Econometría Financiera |
Center, Department or Service: | Universidad de Alicante. Departamento de Fundamentos del Análisis Económico |
Keywords: | Copulas | Expected shortfall | Monte carlo | Value-at-Risk |
Issue Date: | 16-Jan-2024 |
Publisher: | Taylor & Francis |
Citation: | Communications in Statistics - Simulation and Computation. 2024. https://doi.org/10.1080/03610918.2023.2300372 |
Abstract: | We provide Monte Carlo evidence on the efficiency gains obtained in GARCH-based estimations of value-at-risk (VaR) and expected shortfall (ES) by incorporating dependence information through copulas and subsequently using full maximum likelihood (FML) estimates. First, we consider an individual returns series; in this case, the efficiency gain stems from exploiting the relationship with another returns series using a copula model. Second, we consider a portfolio returns series obtained as a linear combination of returns series related through a copula model; in this case, the efficiency gain stems from using FML estimates instead of two-stage ML estimates. We consider three copulas models in order to analyze the effect of the type and degree of tail dependence on the results. Our results show that, in these situations, using copula models and FML leads to a substantial reduction in the mean squared error of the VaR and ES estimates when there is a relatively high degree of dependence between returns (up to 70% in the presence of lower-tail dependence) and a notable improvement in the performance of backtesting procedures. |
Sponsor: | Financial support from the Spanish Government under project PID2021-124860NB-I00 and from Generalitat Valenciana under project CIPROM/2021/ 060 is gratefully acknowledged. |
URI: | http://hdl.handle.net/10045/140268 |
ISSN: | 0361-0918 (Print) | 1532-4141 (Online) |
DOI: | 10.1080/03610918.2023.2300372 |
Language: | eng |
Type: | info:eu-repo/semantics/article |
Rights: | © 2024 Taylor & Francis Group, LLC |
Peer Review: | si |
Publisher version: | https://doi.org/10.1080/03610918.2023.2300372 |
Appears in Collections: | INV - Finanzas de Mercado y Econometría Financiera - Artículos de Revistas INV - ELYE - Artículos de Revistas |
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Castillo-Brais_etal_2024_Communications-in-Statistics_final.pdf | Versión final (acceso restringido) | 820,3 kB | Adobe PDF | Open Request a copy |
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