Modeling the Dependence of Losses of a Financial Portfolio Using Nested Archimedean Copulas

Abstract

In financial analysis, stochastic models are more and more used to estimate potential outcomes in a risky framework. +is paper proposes an approach of modeling the dependence of losses on securities, and the potential loss of the portfolio is divided into sectors each including two subsectors. +e Weibull model is used to describe the stochastic behavior of the default time while a nested class of Archimedean copulas at three levels is used to model the maximum of the value at risk of the portfolio.