Applied Mathematics and Nonlinear Sciences
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Journal

Applied Mathematics and Nonlinear Sciences


Volume
& Issue

Volume 6, Issue 2


Published
on

December 13, 2021


Pages

901-916


DOI

Article

Adoption of deep learning Markov model combined with copula function in portfolio risk measurement

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Authors

Liangxiong Li Affiliation:
Fujian Jiangxia University, Fujian, China
and Bishr Muhamed Muwafak Affiliation:
Department of Accounting and Finance, Faculty of Administrative Sciences, Applied Science University, Al Eker, Kingdom of Bahrain


Abstract

In order to accurately describe the risk dependence structure and correlation between financial variables, carry out scientific financial risk assessment, and provide the basis for accurate financial decision-making, first the basic theory of Copula function is established and the mixed Copula model is constructed. Then the hybrid Copula model is nested in a hidden Markov model (HMM), the risk dependences among banking, insurance, securities and trust industries are analysed, and the Copula–Garch model is constructed for empirical analysis of investment portfolio. Finally, the deep learning Markov model is adopted to predict the financial index. The results show that the mixed Copula model based on HMM is more effective than the single Copula and the mixed Copula models. The empirical structure shows that among the four major financial industries in China, the banking and insurance industries have strong interdependence and high probability of risk contagion. The investment failure rate under 95%, 97.5% and 99% confidence intervals calculated by Copula–Garch model are 4.53%, 2.17% and 1.08%, respectively. Moreover, the errors of deep learning Markov model in stock price prediction of Shanghai Pudong Development Bank (sh600000), Guizhou Moutai (sh600519) and China Ping An Insurance (sh601318) are 2.56%, 2.98% and 3.56% respectively, which indicates that the four major financial industries in China have strong interdependence and risk contagion, so that the macro or systemic risks may arise, and the deep-learning Markov model can be adopted to predict the stock prices.


Keywords

mixed Copula model, HMM, financial index, risk contagion, investment failure rate


Citation

Li, L. & Muwafak, B. M. (2021). Adoption of deep learning markov model combined with copula function in portfolio risk measurement. Applied Mathematics and Nonlinear Sciences, 6(2), 901–916. https://doi.org/10.2478/amns.2021.2.00112
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