Application of Vine Copulas to Credit Portfolio Risk ModelingReport as inadecuate




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1

UniCredit Bank AG, Munich, Germany

2

Department of Statistics and Econometrics, University of Erlangen-Nürnberg, Germany





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Author to whom correspondence should be addressed.



Academic Editor: Jingzhi Huang

Abstract In this paper, we demonstrate the superiority of vine copulas over conventional copulas when modeling the dependence structure of a credit portfolio. We show statistical and economic implications of replacing conventional copulas by vine copulas for a subportfolio of the Euro Stoxx 50 and the SandP 500 companies, respectively. Our study includes D-vines and R-vines where the bivariate building blocks are chosen from the Gaussian, the t and the Clayton family. Our findings are i the conventional Gauss copula is deficient in modeling the dependence structure of a credit portfolio and economic capital is seriously underestimated; ii D-vine structures offer a better statistical fit to the data than classical copulas, but underestimate economic capital compared to R-vines; iii when mixing different copula families in an R-vine structure, the best statistical fit to the data can be achieved which corresponds to the most reliable estimate for economic capital. View Full-Text

Keywords: pair-copula constructions; vine copulas; Archimedean and elliptical copulas; credit portfolio risk; economic capital; R-vine; D-vine pair-copula constructions; vine copulas; Archimedean and elliptical copulas; credit portfolio risk; economic capital; R-vine; D-vine





Author: Marco Geidosch 1,* and Matthias Fischer 2

Source: http://mdpi.com/



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