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- Title
Systemic Risk Modeling with Lévy Copulas.
- Authors
Yuhao Liu; Djuri´c, Petar M.; Young Shin Kim; Rachev, Svetlozar T.; Glimm, James
- Abstract
We investigate a systemic risk measure known as CoVaR that represents the value-at-risk (VaR) of a financial system conditional on an institution being under distress. For characterizing and estimating CoVaR, we use the copula approach and introduce the normal tempered stable (NTS) copula based on the Lévy process. We also propose a novel backtesting method for CoVaR by a joint distribution correction. We test the proposed NTS model on the daily S&P 500 index and Dow Jones index with in-sample and out-of-sample tests. The results show that the NTS copula outperforms traditional copulas in the accuracy of both tail dependence and marginal processes modeling.
- Subjects
SYSTEMIC risk (Finance); CAPITAL market; LEVY processes; STANDARD &; Poor's 500 Index; VALUE at risk
- Publication
Journal of Risk & Financial Management, 2021, Vol 14, Issue 6, p1
- ISSN
1911-8066
- Publication type
Article
- DOI
10.3390/jrfm14060251