International Journal of Business and Economics Volume 9, No. 3 December, 2010

A Versatile Copula and Its Application to Risk Measures

Jeungbo Shim

Department of Business Administration, Illinois Wesleyan University, U.S.A.

Eun-Joo Lee

Department of Mathematics, Millikin University, U.S.A.

Seung-Hwan Lee

Department of Mathematics and Computer Science, Illinois Wesleyan University, U.S.A.

Abstract

This paper proposes a copula that has versatile properties. We apply grouped t and versatile t copulas to estimate Value at Risk and expected shortfall using a sample of firms in the US property-liability insurance industry. We perform goodness-of-fit tests to assess the adequacy of the copula models selected. We find that a versatile copula is effective in estimating dependence structures of non-homogeneous multivariate risks.

Keywords：dependence structure, versatility, grouped t copula, value at risk.

JEL Classifications：C00, C13.

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