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Open AccessArticle

Market-Risk Optimization among the Developed and Emerging Markets with CVaR Measure and Copula Simulation

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Department of Finance and Investment, Imam Muhammad Bin Saud Islamic University, Riyadh 5701, Saudi Arabia
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LARTIGE, University of Kairouan, Dar El Amen Kairouan 3100, Tunisia
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Finance Law & Control, Montpellier Business School, 34000 Montpellier, France
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Rajagiri Business School, Rajagiri Valley Campus, Kochi 682 039, India
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Author to whom correspondence should be addressed.
Risks 2019, 7(3), 78; https://doi.org/10.3390/risks7030078
Received: 3 May 2019 / Revised: 16 June 2019 / Accepted: 26 June 2019 / Published: 7 July 2019
In this paper, the generalized Pareto distribution (GPD) copula approach is utilized to solve the conditional value-at-risk (CVaR) portfolio problem. Particularly, this approach used (i) copula to model the complete linear and non-linear correlation dependence structure, (ii) Pareto tails to capture the estimates of the parametric Pareto lower tail, the non-parametric kernel-smoothed interior and the parametric Pareto upper tail and (iii) Value-at-Risk (VaR) to quantify risk measure. The simulated sample covers the G7, BRICS (association of Brazil, Russia, India, China and South Africa) and 14 popular emerging stock-market returns for the period between 1997 and 2018. Our results suggest that the efficient frontier with the minimizing CVaR measure and simulated copula returns combined outperforms the risk/return of domestic portfolios, such as the US stock market. This result improves international diversification at the global level. We also show that the Gaussian and t-copula simulated returns give very similar but not identical results. Furthermore, the copula simulation provides more accurate market-risk estimates than historical simulation. Finally, the results support the notion that G7 countries can provide an important opportunity for diversification. These results are important to investors and policymakers. View Full-Text
Keywords: copula; portfolio optimization; risk measures; conditional value-at-risk; risk management copula; portfolio optimization; risk measures; conditional value-at-risk; risk management
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Trabelsi, N.; Tiwari, A.K. Market-Risk Optimization among the Developed and Emerging Markets with CVaR Measure and Copula Simulation. Risks 2019, 7, 78.

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