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The Role of Copulas in the Housing Crisis*

* This paper has been replicated

Author

Listed:
  • David M. Zimmer

    (Western Kentucky University)

Abstract

Due to its simplicity and familiarity, the Gaussian copula is popular in calculating risk in collaterized debt obligations, but it imposes asymptotic independence such that extreme events appear to be unrelated. This restriction might be innocuous in normal times, but during extreme events, such as the housing crisis, the Gaussian copula might be inappropriate. This paper explores various copula specifications and finds that the degree to which housing prices are related based on the Gaussian copula is too small compared with real housing price data. © 2012 The President and Fellows of Harvard College and the Massachusetts Institute of Technology.

Suggested Citation

  • David M. Zimmer, 2012. "The Role of Copulas in the Housing Crisis," The Review of Economics and Statistics, MIT Press, vol. 94(2), pages 607-620, May.
    • Handle: RePEc:tpr:restat:v:94:y:2012:i:2:p:607-620
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    Replication

    This item has been replicated by:
  • Anson T. Y. Ho & Kim P. Huynh & David T. Jacho‐Chávez, 2016. "Flexible Estimation of Copulas: An Application to the US Housing Crisis," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 31(3), pages 603-610, April.

    • More about this item

    Keywords

    Clayton; Gumbel; CDO; conditional probability; dependence; bubble; contagion;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models

    Lists

    This item is featured on the following reading lists, Wikipedia, or ReplicationWiki pages:
    1. The Role of Copulas in the Housing Crisis (REStat 2012) in ReplicationWiki

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