Risk Estimation in Exchange Rate Markets Based on Stochastic Copula Approach

Risk estimation is of great importance in financial risk management. In this study, the risk estimation of the exchange rate portfolio is performed via the stochastic copula approach. This model-based latent process has a parameter that changes over time and thus can model the dependency structure b...

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Bibliographic Details
Published inDiscrete dynamics in nature and society Vol. 2022; no. 1
Main Authors Terzi, Erol, Yildirim, Emre, Saribacak, Bünyamin, Cengiz, Mehmet Ali
Format Journal Article
LanguageEnglish
Published New York Hindawi 2022
John Wiley & Sons, Inc
Hindawi Limited
Subjects
Autoregressive models
Confidence intervals
Econometrics
Financial management
Foreign exchange
Foreign exchange rates
Gold
Normal distribution
Parameter estimation
Process parameters
Risk management
Securities markets
Stochastic models
Stock exchanges
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Summary:Risk estimation is of great importance in financial risk management. In this study, the risk estimation of the exchange rate portfolio is performed via the stochastic copula approach. This model-based latent process has a parameter that changes over time and thus can model the dependency structure between variables in a comprehensive and dynamic way. First, the marginals of the returns are handled with ARMA-GARCH-type models. Then, the dependency between variables is modeled via the stochastic copula approach. Finally, risk estimates are carried out at 95% and 99% confidence level for the foreign exchange portfolios. It is found that the proposed risk estimation model based on the stochastic copula approach outperforms both classical methods and static copula models.
ISSN:1026-0226
1607-887X
DOI:10.1155/2022/8467691