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Dependence modeling and portfolio risk estimation using GARCH-copula approach

Past studies have shown that linear correlation measure may result in misleading interpretations and implications of dependency when financial variables are involved. The copula approach can be adopted as an alternative for measuring dependence as it provides the solution to fat tail problems in mul...

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Main Authors: Ruzanna Ab Razak,, Noriszura Ismail,
Format: Article
Language:English
Published: Penerbit Universiti Kebangsaan Malaysia 2019
Online Access:http://journalarticle.ukm.my/13749/1/24%20Ruzanna%20Ab%20Razak.pdf
http://journalarticle.ukm.my/13749/
http://www.ukm.my/jsm/malay_journals/jilid48bil7_2019/KandunganJilid48Bil7_2019.html
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spelling my-ukm.journal.137492019-11-29T10:33:40Z http://journalarticle.ukm.my/13749/ Dependence modeling and portfolio risk estimation using GARCH-copula approach Ruzanna Ab Razak, Noriszura Ismail, Past studies have shown that linear correlation measure may result in misleading interpretations and implications of dependency when financial variables are involved. The copula approach can be adopted as an alternative for measuring dependence as it provides the solution to fat tail problems in multivariate cases which arises from the probability of large or extreme co-movements. Due to limited studies on copulas using Islamic financial data, this study set outs to obtain a clear picture on the dependence between Islamic and conventional stock markets in Malaysia. Firstly, we model the dependence between Islamic and conventional returns data using the copula-ARMA-GARCH models with normal and non-normal error distributions, and secondly, we evaluate the portfolios of Islamic and conventional indices using recent risk measures. This paper shows that, by using the copula approach for measuring the dependency between two financial variables while maintaining their true nature as described by the ARMA-GARCH models, meaningful interpretation can be made about the association of the financial variables which reflects the real association between markets. Furthermore, this study proposes a set of procedures on how portfolio risks can be estimated using VaR based on the ARMA(p,q)-GARCH(1,1)-t-copula models including backtesting via simulation. Penerbit Universiti Kebangsaan Malaysia 2019-07 Article PeerReviewed application/pdf en http://journalarticle.ukm.my/13749/1/24%20Ruzanna%20Ab%20Razak.pdf Ruzanna Ab Razak, and Noriszura Ismail, (2019) Dependence modeling and portfolio risk estimation using GARCH-copula approach. Sains Malaysiana, 48 (7). pp. 1547-1555. ISSN 0126-6039 http://www.ukm.my/jsm/malay_journals/jilid48bil7_2019/KandunganJilid48Bil7_2019.html
institution Universiti Kebangsaan Malaysia
building Tun Sri Lanang Library
collection Institutional Repository
continent Asia
country Malaysia
content_provider Universiti Kebangsaan Malaysia
content_source UKM Journal Article Repository
url_provider http://journalarticle.ukm.my/
language English
description Past studies have shown that linear correlation measure may result in misleading interpretations and implications of dependency when financial variables are involved. The copula approach can be adopted as an alternative for measuring dependence as it provides the solution to fat tail problems in multivariate cases which arises from the probability of large or extreme co-movements. Due to limited studies on copulas using Islamic financial data, this study set outs to obtain a clear picture on the dependence between Islamic and conventional stock markets in Malaysia. Firstly, we model the dependence between Islamic and conventional returns data using the copula-ARMA-GARCH models with normal and non-normal error distributions, and secondly, we evaluate the portfolios of Islamic and conventional indices using recent risk measures. This paper shows that, by using the copula approach for measuring the dependency between two financial variables while maintaining their true nature as described by the ARMA-GARCH models, meaningful interpretation can be made about the association of the financial variables which reflects the real association between markets. Furthermore, this study proposes a set of procedures on how portfolio risks can be estimated using VaR based on the ARMA(p,q)-GARCH(1,1)-t-copula models including backtesting via simulation.
format Article
author Ruzanna Ab Razak,
Noriszura Ismail,
spellingShingle Ruzanna Ab Razak,
Noriszura Ismail,
Dependence modeling and portfolio risk estimation using GARCH-copula approach
author_facet Ruzanna Ab Razak,
Noriszura Ismail,
author_sort Ruzanna Ab Razak,
title Dependence modeling and portfolio risk estimation using GARCH-copula approach
title_short Dependence modeling and portfolio risk estimation using GARCH-copula approach
title_full Dependence modeling and portfolio risk estimation using GARCH-copula approach
title_fullStr Dependence modeling and portfolio risk estimation using GARCH-copula approach
title_full_unstemmed Dependence modeling and portfolio risk estimation using GARCH-copula approach
title_sort dependence modeling and portfolio risk estimation using garch-copula approach
publisher Penerbit Universiti Kebangsaan Malaysia
publishDate 2019
url http://journalarticle.ukm.my/13749/1/24%20Ruzanna%20Ab%20Razak.pdf
http://journalarticle.ukm.my/13749/
http://www.ukm.my/jsm/malay_journals/jilid48bil7_2019/KandunganJilid48Bil7_2019.html
_version_ 1651868059567128576
score 13.211869

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