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Goodness-of-fit test for copulas

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  • Panchenko, V.

    ()
    (Universiteit van Amsterdam)

Abstract

Copulas are often used in finance to characterize the dependence between assets. However, a choice of the functional form for the copula is an open question in the literature. This paper develops a goodness-of-fit test for copulas based on positive definite bilinear forms. The suggested test avoids the use of plug-in estimators that is the common practice in the literature. The test statistics can be consistently computed on the basis of V-estimators even in the case of large dimensions. The test is applied to a dataset of US large cap stocks to assess the performance of the Gaussian copula for the portfolios of assets of various dimension. The Gaussian copula appears to be inadequate to characterize the dependence between assets.

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File URL: http://www1.fee.uva.nl/cendef/publications/papers/artcopula.pdf
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Bibliographic Info

Paper provided by Universiteit van Amsterdam, Center for Nonlinear Dynamics in Economics and Finance in its series CeNDEF Working Papers with number 04-16.

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Date of creation: 2004
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Handle: RePEc:ams:ndfwpp:04-16

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Fax: + 31 20 525 52 83
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Web page: http://www.fee.uva.nl/cendef/
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  1. Yannick Malevergne & Didier Sornette, 2003. "Testing the Gaussian copula hypothesis for financial assets dependences," Post-Print, HAL hal-00520539, HAL.
  2. C. W. Granger & E. Maasoumi & J. Racine, 2004. "A Dependence Metric for Possibly Nonlinear Processes," Journal of Time Series Analysis, Wiley Blackwell, Wiley Blackwell, vol. 25(5), pages 649-669, 09.
  3. Bouye, Eric & Durlleman, Valdo & Nikeghbali, Ashkan & Riboulet, Gaël & Roncalli, Thierry, 2000. "Copulas for finance," MPRA Paper 37359, University Library of Munich, Germany.
  4. Mark B. Wise & Vineer Bhansali, 2002. "Implications of Correlated Default For Portfolio Allocation To Corporate Bonds," Papers nlin/0209010, arXiv.org.
  5. Yanqin Fan & Xiaohong Chen & Andrew Patton, 2004. "(IAM Series No 003) Simple Tests for Models of Dependence Between Multiple Financial Time Series, with Applications to U.S. Equity Returns and Exchange Rates," FMG Discussion Papers, Financial Markets Group dp483, Financial Markets Group.
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Cited by:
  1. Kallenberg, Wilbert C.M., 2008. "Modelling dependence," Insurance: Mathematics and Economics, Elsevier, vol. 42(1), pages 127-146, February.
  2. Wanling Huang & Artem Prokhorov, 2010. "A Goodness-of-fit Test for Copulas," Working Papers, Concordia University, Department of Economics 10002, Concordia University, Department of Economics, revised Apr 2010.
  3. Jean-David Fermanian, 2012. "An overview of the goodness-of-fit test problem for copulas," Papers 1211.4416, arXiv.org.
  4. Cees Diks & Valentyn Panchenko & Dick van Dijk, 2008. "Out-of-sample comparison of copula specifications in multivariate density forecasts," Discussion Papers, School of Economics, The University of New South Wales 2008-23, School of Economics, The University of New South Wales.
  5. Kallenberg, Wilbert C.M., 2009. "Estimating copula densities, using model selection techniques," Insurance: Mathematics and Economics, Elsevier, vol. 45(2), pages 209-223, October.
  6. Fantazzini, Dean, 2011. "Analysis of multidimensional probability distributions with copula functions. III," Applied Econometrics, Publishing House "SINERGIA PRESS", Publishing House "SINERGIA PRESS", vol. 24(4), pages 100-130.
  7. Marc Gronwald & Janina Ketterer & Stefan Trück, 2011. "The Dependence Structure between Carbon Emission Allowances and Financial Markets - A Copula Analysis," CESifo Working Paper Series 3418, CESifo Group Munich.

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