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Exact Maximum Likelihood Estimation for Copula Models

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  • Jin Zhang
  • Wing Long Ng
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    Abstract

    In recent years, copulas have become very popular in financial research and actuarial science as they are more flexible in modelling the co-movements and relationships of risk factors as compared to the conventional linear correlation coefficient by Pearson. However, a precise estimation of the copula parameters is vital in order to correctly capture the (possibly nonlinear) dependence structure and joint tail events. In this study, we employ two optimization heuristics, namely Differential Evolution and Threshold Ac- cepting to tackle the parameter estimation of multivariate t distribution models in the EML approach. Since the evolutionary optimizer does not rely on gradient search, the EML approach can be applied to estimation of more complicated copula models such as high-dimensional copulas. Our experimental study shows that the proposed method provides more robust and more accurate estimates as compared to the IFM approach.

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    File URL: http://comisef.eu/files/wps038.pdf
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    Bibliographic Info

    Paper provided by COMISEF in its series Working Papers with number 038.

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    Length: 13 pages
    Date of creation: 17 May 2010
    Date of revision:
    Handle: RePEc:com:wpaper:038

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    Web page: http://www.comisef.eu

    Related research

    Keywords: Copula Models; Parameter Inference; Exactly Maximum Likelihood; Differential Evolution; Threshold Accepting;

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    1. Fantazzini, Dean, 2010. "Three-stage semi-parametric estimation of T-copulas: Asymptotics, finite-sample properties and computational aspects," Computational Statistics & Data Analysis, Elsevier, vol. 54(11), pages 2562-2579, November.
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