Financial Dependence Analysis: Applications of Vine Copulae
AbstractThis paper features the application of a novel and recently developed method of statistical and mathe- matical analysis to the assessment of financial risk: namely Regular Vine copulas. Dependence modelling using copulas is a popular tool in financial applications, but is usually applied to pairs of securities. Vine copulas offer greater flexibility and permit the modelling of complex dependency patterns using the rich variety of bivariate copulas which can be arranged and analysed in a tree structure to facilitate the anal- ysis of multiple dependencies. We apply Regular Vine copula analysis to a sample of stocks comprising the Dow Jones Index to assess their interdependencies and to assess how their correlations change in different economic circumstances using three different sample periods: pre-GFC (Jan 2005- July 2007), GFC (July 2007-Sep 2009), and post-GFC periods (Sep 2009 - Dec 2011). The empirical results suggest that the dependencies change in a complex manner, and there is evidence of greater reliance on the Student t copula in the copula choice within the tree structures for the GFC period, which is consistent with the existence of larger tails in the distributions of returns for this period. One of the attractions of this approach to risk modelling is the flexibility in the choice of distributions used to model co-dependencies.
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Bibliographic InfoPaper provided by Edith Cowan University, School of Business in its series Working papers with number 2013-03.
Length: 20 pages
Date of creation: Feb 2013
Date of revision:
Regular Vine Copulas; Tree structures; Co-dependence modelling;
Other versions of this item:
- David E. Allen & Mohammad A. Ashraf & Michael McAleer & Robert J. Powell & Abhay K. Singh, 2013. "Financial dependence analysis: applications of vine copulas," Statistica Neerlandica, Netherlands Society for Statistics and Operations Research, vol. 67(4), pages 403-435, November.
- David Allen & Mohammad.A. Ashraf & Michael McAleer & Robert J. Powell & Abhay K. Singh, 2013. "Financial Dependence Analysis: Applications of Vine Copulae," Documentos del Instituto Complutense de AnÃ¡lisis EconÃ³mico 2013-05, Universidad Complutense de Madrid, Facultad de Ciencias Económicas y Empresariales.
- David E Allen & Mohammad.A. Ashraf & Michael McAleer & Robert J Powell & Abhay K Singh, 2013. "Financial Dependence Analysis: Applications of Vine Copulae," KIER Working Papers 843, Kyoto University, Institute of Economic Research.
- David E. Allen & Mohammad A. Ashraf & Michael McAleer & Robert J. Powell & Abhay K. Singh, 2013. "Financial Dependence Analysis: Applications of Vine Copulae," Tinbergen Institute Discussion Papers 13-022/III, Tinbergen Institute.
- G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
- C02 - Mathematical and Quantitative Methods - - General - - - Mathematical Economics
This paper has been announced in the following NEP Reports:
- NEP-ALL-2013-06-16 (All new papers)
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