Modeling International Financial Returns with a Multivariate Regime-switching Copula
AbstractIn order to capture observed asymmetric dependence in international financial returns, we construct a multivariate regime-switching model of copulas. We model dependence with one Gaussian and one canonical vine copula regime. Canonical vines are constructed from bivariate conditional copulas and provide a very flexible way of characterizing dependence in multivariate settings. We apply the model to returns from the G5 and Latin American regions, and document three main findings. First, we discover that models with canonical vines generally dominate alternative dependence structures. Second, the choice of copula is important for risk management, since it modifies the Value-at-Risk (VaR) of international portfolios and produces a better out-of-sample performance. Third, ignoring asymmetric dependence and regime-switching in portfolio selection leads to significant costs for an investor. Copyright The Author 2009. Published by Oxford University Press. All rights reserved. For permissions, please e-mail: email@example.com., Oxford University Press.
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Bibliographic InfoArticle provided by Society for Financial Econometrics in its journal Journal of Financial Econometrics.
Volume (Year): 7 (2009)
Issue (Month): 4 (Fall)
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Other versions of this item:
- CHOLLETE, Loran & HEINEN, Andréas & VALDESOGO, Alfonso, 2008. "Modeling international financial returns with a multivariate regime switching copula," CORE Discussion Papers 2008013, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
- Chollete, Loran & Heinen, Andreas & Valdesogo, Alfonso, 2008. "Modeling International Financial Returns with a Multivariate Regime Switching Copula," MPRA Paper 8114, University Library of Munich, Germany.
- Loran , CHOLLETTE & Andreas , HEINEN & Alfonso , VALDESOGO, 2008. "Modelling international financial returns with a multivariate regime switching copula," Discussion Papers (ECON - DÃ©partement des Sciences Economiques) 2008011, Université catholique de Louvain, Département des Sciences Economiques.
- Chollete, Lorán & Heinen, Andréas & Valdesogo, Alfonso, 2008. "Modeling International Financial Returns with a Multivariate Regime Switching Copula," Discussion Papers 2008/3, Department of Business and Management Science, Norwegian School of Economics.
- C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
- C35 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Discrete Regression and Qualitative Choice Models; Discrete Regressors; Proportions
- G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
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