Testing for Semi-Strong Efficiency in the Czech Stock Market
In recent years financial institutions' risk management has undergone far-reaching changes. Financial institutions have improved their risk management which nowadays often surpasses the new regulatory standards ('Basel II'). In the context of integrated risk management, financial institutions do not only focus on the risk management within one risk type (market risk, credit risk, insurance risk etc.) but try to improve the understanding of the dependence structure between different risk types. This paper presents a top down approach to aggregate market and credit risk with copulas. Copulas do not only permit a combination of arbitrary marginal distributions, but also a detailed modelling of the dependence structure. In section 1 a short introduction to copulas and to the concept of positive tail dependence is given. Section 2 outlines how the dependence structure between market and credit portfolio returns may be estimated. Finally, section 3 presents a detailed instruction on how to simulate a joint distribution for market and credit portfolio returns with a normal copula that exhibits no positive tail dependence and a Student t-copula that exhibits positive (symmetric) tail dependence. The importance of positive tail dependence for the estimation of economic capital is highlighted in an example. (fragment of text)
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