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The Role of Copulas in the Housing Crisis

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Author Info

  • 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.

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File URL: http://www.mitpressjournals.org/doi/pdf/10.1162/REST_a_00172
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Bibliographic Info

Article provided by MIT Press in its journal Review of Economics and Statistics.

Volume (Year): 94 (2012)
Issue (Month): 2 (May)
Pages: 607-620

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Handle: RePEc:tpr:restat:v:94:y:2012:i:2:p:607-620

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Web page: http://mitpress.mit.edu/journals/

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Web: http://mitpress.mit.edu/journal-home.tcl?issn=00346535

Related research

Keywords: Clayton; Gumbel; CDO; conditional probability; dependence; bubble; contagion;

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Cited by:
  1. D'Antoni, Jeremy M. & Detre, Joshua D., 2013. "Determining the Nature of Dependency between Agribusiness and Non-Agribusiness Stocks," 2013 Annual Meeting, February 2-5, 2013, Orlando, Florida 143080, Southern Agricultural Economics Association.

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