The Use Of Copulas in Estimating The Value at Risk (VaR) Of The IDX Development Board and Main Board Indices with Monte Carlo Simulation

Abstract

This article discusses the use of copulas to estimate Value at Risk (VaR) with Monte Carlo simulation in the Indonesian stock market. As an illustration, we construct a portfolio which consists of the IDX Main Board and Development Board Indices in equal proportion (50% each). Based on Kupiec’s Proportion of Failure Test (POF), the estimated 99% VaR with the Monte Carlo-Copula method is not rejected. Therefore, it can be concluded that the Monte Carlo-Copula method can be used to estimate VaR in the Indonesian stock market.