Risk evaluation of exchange rate portfolio based on the copula-GARCH approach

Authors : Emre Yıldırım, Mehmet Ali Cengiz

Pages : 1-13

View : 84 | Download : 71

Publication Date : 2024-06-30

Article Type : Research Paper

Abstract :In this paper, risk estimation for the portfolio consisting of USD/TRY and JPY/TRY exchange rates is performed via the copula-GARCH approach. For this purpose, risk estimation models are created by means of alternative weighting techniques. The dependency between the related variables is modelled through copulas since they provide a flexible method for modelling various dependency structures such as tail dependency. It is aimed to obtain a better risk estimation model by combining the copula-GARCH approach with several weighting techniques. It is decided that the dependency between USD/TRY and JPY/TRY exchange rates is best modeled by Students\' t copula among copulas tried in this study. The risk estimation models produced by the copula-GARCH approach outperform classical methods. Finally, it is concluded that the risk estimation model based on the copula-GARCH approach combined with the minimum variance weights gives better results than other weighting techniques in terms of both the performance of the risk measures and the backtesting outcomes.
Keywords : Kopula yaklaşımı, Bağımlılık modelleme, Döviz kuru piyasası, Risk yönetimi