Is there a gain to explicitly modelling extremes? A risk management analysis

There is a requirement for decisions taken by risk managers in investment banks to be based upon reliable measures.

Author(s) :

Jean-Christophe Meyfredi

Professor of Finance,Research Associate, Edhec Risk and Asset Management Research Centre

Most of the time some strong assumptions are made to simplify the estimation process and there has to be a trade-off between ease of estimate and accuracy. In this paper we develop a copula-based approach in order to estimate the Value-at-Risk of portfolios containing financial assets. We propose a survival copula that could solve many difficulties that risk managers currently have to face. We compare the results it provides to those of more classic copulas, on portfolios composed of two and three indices between 1991 and 2005, so that our study covers various market trends. The Heavy Right Tail copula we propose fulfills the various backtest constraints required by regulators.
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Is there a gain to explicitly modelling extremes? A risk management analysis...
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Type : Working paper
Date : le 07/03/2005
Extra information : For more information, please contact Séverine Anjubault, EDHEC Research and Development Department [ severine.anjubault@edhec.edu ] The contents of this paper do not necessarily reflect the opinions of EDHEC Business School.
Research Cluster : Finance

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