Market-Risk Optimization among the Developed and Emerging Markets with CVaR Measure and Copula Simulation

Risks

Nader Trabelsi¹  AviralKumar Tiwari² 

[1] Department of Finance and Investment, Imam Muhammad Bin Saud Islamic University, Riyadh 5701, Saudi Arabia;;Finance Law &

关键词: copula;    portfolio optimization;    risk measures;    conditional value-at-risk;    risk management;   

DOI  :  10.3390/risks7030078

来源: DOAJ

【 摘 要 】

In this paper, the generalized Pareto distribution (GPD) copula approach is utilized to solve the conditional value-at-risk (CVaR) portfolio problem. Particularly, this approach used (i) copula to model the complete linear and non-linear correlation dependence structure, (ii) Pareto tails to capture the estimates of the parametric Pareto lower tail, the non-parametric kernel-smoothed interior and the parametric Pareto upper tail and (iii) Value-at-Risk (VaR) to quantify risk measure. The simulated sample covers the G7, BRICS (association of Brazil, Russia, India, China and South Africa) and 14 popular emerging stock-market returns for the period between 1997 and 2018. Our results suggest that the efficient frontier with the minimizing CVaR measure and simulated copula returns combined outperforms the risk/return of domestic portfolios, such as the US stock market. This result improves international diversification at the global level. We also show that the Gaussian and t-copula simulated returns give very similar but not identical results. Furthermore, the copula simulation provides more accurate market-risk estimates than historical simulation. Finally, the results support the notion that G7 countries can provide an important opportunity for diversification. These results are important to investors and policymakers.

【 授权许可】

Unknown