A Bivariate Copula-based Model for a Mixed Binary-Continuous Distribution: A Time Series Approach
AbstractIn this paper we present a copula-based model for a binary and a continuous variable in a time series setup. Within this modeling framework both marginals can be equipped with their own dynamics whereas the contemporaneous dependence between both processes can be flexibly captured via a copula function. We propose a method for testing the goodness-offit of such a time series model using probability integral transforms (PIT). This verification procedure allows not only a verification of the goodness-offit of the estimated marginal distribution for a continuous variable but also the conditional distribution of a continuous variable given the outcome of its binary counterpart (i.e. the adequacy of the copula choice). We test the model on an empirical example: investigating the relationship between trading volume and the indicators of arbitrarily ’large’ price movements on the interbank EUR/PLN spot market.
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Bibliographic InfoArticle provided by CEJEME in its journal Central European Journal of Economic Modelling and Econometrics.
Volume (Year): 4 (2012)
Issue (Month): 2 (June)
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copula function; mixed binary-continuous distribution; ACD models; market microstructure;
Find related papers by JEL classification:
- C18 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Methodolical Issues: General
- G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
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