Identifying Dependence Structure among Equities in Indian Markets using Copulas

Grover, Vaibhav (2015): Identifying Dependence Structure among Equities in Indian Markets using Copulas.

Abstract

In this study we have examined that assets returns in Indian markets do not follow an elliptical dependence structure; asymmetric tail dependence can be observed among asset returns particularly when the assets exhibit downside returns in a bearish market. We have used Elliptical, Archimedean and Canonical Vine copulas to model such dependence structure in large portfolios. Using certain goodness-of-fit tests we find that Archimedean copulas are insufficient to model the dependence among assets in a large portfolio. We have also compared copula models using an out-of-sample Value-at-Risk (VaR) calculation and comparing results to the historical data. It is observed that the Canonical Vine copulas consistently capture the variation in weekly and daily VaR values.

• Item Type: MPRA Paper
• Language: English
• Keywords: copula, vine copulas, Value-at-Risk
• Subjects: G - Financial Economics > G1 - General Financial Markets > G17 - Financial Forecasting and Simulation

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