Copulas Applications in Estimating Value - at - Risk (VaR) : Iranian Crude Oil Prices

Copulas Applications in Estimating Value - at - Risk (VaR) : Iranian Crude Oil Prices

Crude oil being the primary source of energy has been unquestioningly the main driving engine of every country in this world whether it is the oil producer and/or oil consumer. Crude oil, one of the key strategic products in the global market, may influence the economy of the exporting and importing countries. Iran is one of the major crude oil exporting partners of the Organization of the Petroleum Exporting Countries (OPEC). Analys of the risk measures associated with the Iranian oil price data is of strategic importance to the Iranian government and policy makers in particular for the short- and long-term planning for setting up the oil production targets. (Oil-price risk-management focuses mainly on when and how an organization can best prevent the costly exposure to the price risk. Walue-at-Risk (WaR) is the commonly accepted instrument of risk-measure and is evaluated by analysing the negative tail of the probability distributions of the returns/profit and loss. Among several approaches for calculating WaR. the most Common approaches are variance-CoVariance approach historical simullation. Monte-Carlo simulation. Recently, copula, functions have emerged as a powerful tool to model and similate multivariate probability distributions. Copula applications have been noted predominantly in the areas of finance. actuary, economics and health and clinical studies. In addition, copulas are useful devices to deal with the non-normality and non-lineari sues which are frequently observed in cases of financial time series data. In this paper we shall apply copulas namely: Frank copula. Clayton copula, and Gumbel copula to analyse the time series crude oil price data of Iran in respect of OPEC prices. Data considered is the monthly crude oil prices of Iran and OPEC from January 1997 to December 2008. We shall discuss the results with respect to the risk associated with Iranian crude oil prices.