Quantifying Diversification Effects of A Portfolio Using the Generalised Extreme Value Distribution- Archimedean Gumbel Copula Model

Authors

Delson Chikobvu, Department of Mathematical Statistics and Actuarial Science, Faculty of Natural and Agricultural Sciences, University of the Free State, Bloemfontein, South AfricaFollow
Owen Jakata, Department of Mathematical Statistics and Actuarial Science, Faculty of Natural and Agricultural Sciences, University of the Free State, Bloemfontein, South AfricaFollow

Author Country (or Countries)

South Africa

Abstract

This paper uses the Generalized Extreme Value Distribution - Archimedean Gumbel copula modelling approach to quantify diversification effects in a bivariate portfolio of financial asset returns. This paper estimates Value at Risk (VaR) and Expected Shortfall (ES) of a portfolio consisting of the South African Industrial and Financial Indices using Monte-Carlo simulation. Results show that the portfolio risks are smaller than the sum of the individual component risks, indicating diversification benefits for investors. This approach is valuable for assessing, preparing, and mitigating risks in investment decisions, particularly for international investors considering cross-market diversification.

Digital Object Identifier (DOI)

https://dx.doi.org/10.18576/amis/170603

Recommended Citation

Chikobvu, Delson and Jakata, Owen (2023) "Quantifying Diversification Effects of A Portfolio Using the Generalised Extreme Value Distribution- Archimedean Gumbel Copula Model," Applied Mathematics & Information Sciences: Vol. 17: Iss. 6, Article 9.
DOI: https://dx.doi.org/10.18576/amis/170603
Available at: https://digitalcommons.aaru.edu.jo/amis/vol17/iss6/9