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Modelling international financial returns with a multivariate regime switching copula

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  • Loran , CHOLLETTE
  • Andreas , HEINEN
  • Alfonso , VALDESOGO

    (UNIVERSITE CATHOLIQUE DE LOUVAIN, Center for Operations Research and Econometrics (CORE))

Abstract

In order to capture observed asymmetric dependence in international financial returns, we construct a multivariate regime-switching model of copula. We model dependence with one Gaussian and one canonical vine copula regime. Canonical vines are construted from bivariate conditional copulas and provide a very flexible way of characterizig dependence in multivariate settings. We apply the model to returns from the G5 and Latin American regions, and document two main findings. First, we discover that models with canonical vines generally dominate alternative dependence structures. Second, the choice of copula is important for risk management, because it modifies the Value at Risk (VaR) of international portfolio returns.

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Bibliographic Info

Paper provided by Université catholique de Louvain, Département des Sciences Economiques in its series Discussion Papers (ECON - Département des Sciences Economiques) with number 2008011.

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Length: 46
Date of creation: 01 Apr 2008
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Handle: RePEc:ctl:louvec:2008011

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Keywords: asymmetric dependence; canonical vine copula; international returns; regime-switching; risk management; Value-at-Risk;

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