Dependence structure and portfolio risk in Iran exchange market by using GARCH-EVT-Copula method
Subject Areas : Financial engineering
Farhad
Ghaffari
1
(Department of Economics, Science and Research Branch, Islamic Azad University, Tehran, Iran)
sahar
fathi
2
(Department of Financial Management, Science and Research Branch, Islamic Azad University, Tehran, Iran.)
Keywords: GARCH, COPULA, Value at Risk (VaR), Dependence structure, Portfolio risk, Conditional VaR (CVaR), Extreme value theory (EVT),
Abstract :
Abstract In this research, the GARCH-EVT-COPULA method is investigated to determine the dependency structure and portfolio risk estimation on the foreign exchange market data in Iran. GARCH-EVT models are used to mariginal distribution of each of four currency returns series. For the joint model, we choose five copuls with different dependence structure such as Frank, Clayton, Gumble, Normal and t-Student copulas. In this research portfolio risk is measured using VaR and CVaR.The statistical sample of this study is the daily exchange rate of USD,EURO, Pound and AED for the free market with 5 working days from September to the end of 1396.Based on the results of the research, using the Akaike information criterion values, the t-student function is the best fitted copula model for investigating the dependency structure.Exchange rates have the same upper and lower tail dependencies. Accordingly, in the markets for boom (severe positive) and stagnation (severe negative), the dependence between the two exchange rates is the same.
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