A new copula for modeling portfolios with skewed,leptokurtic and high-order dependent risk factors |
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| Affiliation: | 1. Institute of Business and Management, National Yang Ming Chiao Tung University, 118 Chung-Hsiao West Road, Section 1, Taipei, Taiwan;2. Graduate Institute of Finance, National Taiwan University of Science and Technology, 43, Keelung Rd., Section 4, Taipei, Taiwan;3. Center for General Education, Chung Yuan Christian University, 200 Chung Pei Road, Chung Li District, Taoyuan City, Taiwan;4. Science and Technology Policy Research and Information Center, National Applied Research Laboratories, 106 Heping East Road, Section 2, Taipei, Taiwan;5. Power Generation Division, Taiwan Power Company, 242, Roosevelt Road, Section 3, Taipei, Taiwan;1. School of Business, Shantou University, Shantou, China;2. School of Economics and Statistics, Guangzhou University, Guangzhou, China |
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| Abstract: | The paper proposes a new copula for modeling higher-order dependencies between pairs of portfolio assets, employing orthogonal polynomials to model symmetric co-kurtoses. Skewness and leptokurtosis of portfolio margins are modeled either with the Gram–Charlier expansion of the Normal distribution or Gram–Charlier-like expansions of leptokurtic laws. Details on the estimation method of this copula are provided, and a simulation study is carried out to assess its potential range of applicability with respect to widely employed alternatives in the copula literature. Empirical evidence of the suitability of this approach to model financial data and compute risk measures is provided. |
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| Keywords: | Copula Co-kurtosis Gram–Charlier expansion GARCH Risk measures |
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