Copula Theory And Application In Financial Engnineering

Abstract

This report will introduce a new way to describe the interdependence between returns and volatility of financial assets. It is based on the concept of copulas. The definition of mathematics, some characteristic properties and practical application of copulas such as risk measurement, portfolio optimization will be presented in this article, but the main application in the paper we want to mentions that described modelling dependence of copulas and risk measurement. Using data from the Vietnam stock market, analyzing one of the daily profit data from 29/10/2012 to 27/10/2017 with a sample portfolio including two index are VN30-INDEX and HNX30-INDEX. Although the concept of copulas is not completely popular in the finance field. However, copulas are a general tool to construct multivariate distributions and to investigate dependence structure between random variables. In this paper, we show that copulas can be extensively used to solve many financial problems. Keyword: Copulas, Risk Management, Gaussian Copula, Student t-copula, Portfolio Optimization, GARCH-Copula Model, Multivariate Independence.