FH-STUDIEN

INVESTIGATING THE DEPENDENCE STRUCTURE BETWEEN MARKET AND CREDIT PORTFOLIOS' PROFITS AND LOSSES IN A TOP-DOWN APPROACH USING INSTITUTION-INTERNAL SIMULATED DATA

AutorInnen
Christian Cech
Ines Fortin
Erscheinungsdatum
2006
Studiengang
Quantitative Asset and Risk Management
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ABSTRACT

This paper examines the dependence structure between 49 monthly observed profits and losses of a financial institution’s market portfolio and simulated credit portfolio profits and losses for the same time horizon in an attempt to parameterise a top-down risk aggregation approach employing copulas. Dependence measures like Spearman’s rho and Kendall’s tau show that ‘on average’ the data are uncorrelated. Also estimation results of the Gaussian, Student t and Frank copula suggest a very low degree of dependence. Among the copulas employed, the Frank copula yields the worst fit, while results for the goodness-of-fit of the Gaussian and Student t copulas are ambiguous. Although copula approaches allow for a more flexible modelling of dependence than traditional approaches, the value of this flexibility is small if there is low dependence. This seems to be the case for the data sample at hand.

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