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Vines climbing higher: risk management for commodity futures markets using a regular vine copula approach

Li, H., Liu, Z. and Wang, S. ORCID: https://orcid.org/0000-0003-2113-5521 (2020) Vines climbing higher: risk management for commodity futures markets using a regular vine copula approach. International Journal of Finance and Economics. ISSN 1099-1158

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To link to this item DOI: 10.1002/ijfe.2280

Abstract/Summary

The volume of trading activity relating to China's commodity futures has grown rapidly over the course of the last decade. To improve risk management in China's commodity futures markets, this paper employs a regular vine (R-vine) copula model to study the dependence structure of commodity futures and to enhance Value-at-Risk (VaR) forecast. In doing so, we find that China’s commodity futures market is not centered on one category of commodity futures and the tail dependence between different categories of commodity futures varies significantly. Based on the dependence structure analyzed using the R-vine copula model, we forecast the VaR of individual indices, which are formed of several commodity futures, as well as forecasting the VaR of an equally-weighted portfolio. Our method can outperform the standard GARCH-VaR method in terms of VaR backtesting. The tool developed within this study will enable those involved in commodity futures markets to fundamentally improve their risk management.

Item Type:Article
Refereed:Yes
Divisions:Faculty of Arts, Humanities and Social Science > School of Politics, Economics and International Relations > Economics
ID Code:92905
Publisher:Wiley

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