Dependence structure between Iranian financial system’s sub sectors: a vine copula approach

Subject Areas : Journal of Investment Knowledge

Soheil  Khalili ¹ (PhD Student, Financial Management, Tehran University)
Reza  Tehrani ² (Professor and Faculty Member, Finance and Insurance, Tehran University)

Received: 2017-12-01 Accepted : 2018-02-04 Published : 2019-06-22

Keywords: dependence structure, copula, pair wise vine constructions, Value at risk,

Abstract :

In this paper, we apply R-Vine copula -ARMA-APGARCH approach to investigate the dynamic relationship between banking, insurance and pension, investment and other financials sub-indexes in Tehran stock exchange. Using a sample of more than 8 years of daily return observations of the financial sub-indexes, we find evidence of significant and symmetric relationship between these variables. Finally, there is evidence to suggest that the application of the vine copula model improves the accuracy of VaR estimates, compared to traditional approaches. This paper results show that vine copula VaR is accurate at 1% and 5% significance levels. This paper’s findings suggest the flexibility and capacity of vine copula structures in financial dependency modeling and risk management    

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