Testing the Gaussian copula hypothesis for financial assets dependences
AbstractUsing one of the key properties of copulas that they remain invariant under an arbitrary monotonic change of variable, we investigate the null hypothesis that the dependence between financial assets can be modelled by the Gaussian copula. We find that most pairs of currencies and pairs of major stocks are compatible with the Gaussian copula hypothesis, while this hypothesis can be rejected for the dependence between pairs of commodities (metals). Notwithstanding the apparent qualification of the Gaussian copula hypothesis for most of the currencies and the stocks, a non-Gaussian copula, such as the Student copula, cannot be rejected if it has sufficiently many 'degrees of freedom'. As a consequence, it may be very dangerous to embrace blindly the Gaussian copula hypothesis, especially when the coefficient of correlation between the pairs of assets is too high, such that the tail dependence neglected by the Gaussian copula can became large, leading to the ignoring of extreme events which may occur in unison.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by HAL in its series Post-Print with number hal-00520539.
Date of creation: 2003
Date of revision:
Publication status: Published, Quantitative Finance, 2003, 3, 4, 231-250
Note: View the original document on HAL open archive server: http://hal.archives-ouvertes.fr/hal-00520539/en/
Contact details of provider:
Web page: http://hal.archives-ouvertes.fr/
Copulas; Dependence Modelisation; Risk Management; Tail Dependence;
Other versions of this item:
- Y. Malevergne & D. Sornette, 2003. "Testing the Gaussian copula hypothesis for financial assets dependences," Quantitative Finance, Taylor & Francis Journals, vol. 3(4), pages 231-250.
- Y. Malevergne & D. Sornette, 2001. "Testing the Gaussian Copula Hypothesis for Financial Assets Dependences," Finance 0111003, EconWPA.
- Y. Malevergne & D. Sornette, 2001. "Testing the Gaussian Copula Hypothesis for Financial Assets Dependences," Papers cond-mat/0111310, arXiv.org.
- C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
- C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General
- F31 - International Economics - - International Finance - - - Foreign Exchange
- G19 - Financial Economics - - General Financial Markets - - - Other
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Richard B. Olsen & Ulrich A. Müller & Michel M. Dacorogna & Olivier V. Pictet & Rakhal R. Davé & Dominique M. Guillaume, 1997. "From the bird's eye to the microscope: A survey of new stylized facts of the intra-daily foreign exchange markets (*)," Finance and Stochastics, Springer, vol. 1(2), pages 95-129.
- P. Gopikrishnan & M. Meyer & L.A.N. Amaral & H.E. Stanley, 1998. "Inverse cubic law for the distribution of stock price variations," The European Physical Journal B - Condensed Matter and Complex Systems, Springer, vol. 3(2), pages 139-140, July.
- De Vries, C.G. & Leuven, K.U., 1994. "Stylized Facts of Nominal Exchange Rate Returns," Papers 94-002, Purdue University, Krannert School of Management - Center for International Business Education and Research (CIBER).
- Kaminsky, Graciela L. & Schmukler, Sergio L., 1999.
"What triggers market jitters? A chronicle of the Asian crisis,"
Policy Research Working Paper Series
2094, The World Bank.
- Kaminsky, Graciela L. & Schmukler, Sergio L., 1999. "What triggers market jitters?: A chronicle of the Asian crisis," Journal of International Money and Finance, Elsevier, vol. 18(4), pages 537-560, August.
- Graciela L. Kaminsky & Sergio L. Schmukler, 1999. "What triggers market jitters: a chronicle of the Asian crisis," International Finance Discussion Papers 634, Board of Governors of the Federal Reserve System (U.S.).
- Joshua Rosenberg, 1999. "Semiparametric Pricing of Multivariate Contingent Claims," New York University, Leonard N. Stern School Finance Department Working Paper Seires 99-028, New York University, Leonard N. Stern School of Business-.
- François Longin, 2001. "Extreme Correlation of International Equity Markets," Journal of Finance, American Finance Association, vol. 56(2), pages 649-676, 04.
- Starica, Catalin, 1999. "Multivariate extremes for models with constant conditional correlations," Journal of Empirical Finance, Elsevier, vol. 6(5), pages 515-553, December.
- Taimur Baig & Ilan Goldfajn, 1998.
"Financial Market Contagion in the Asian Crisis,"
IMF Working Papers
98/155, International Monetary Fund.
- Joe, H., 1993. "Parametric Families of Multivariate Distributions with Given Margins," Journal of Multivariate Analysis, Elsevier, vol. 46(2), pages 262-282, August.
- Umberto Cherubini & Elisa Luciano, 2002. "Multivariate Option Pricing with Copulas," ICER Working Papers - Applied Mathematics Series 05-2002, ICER - International Centre for Economic Research.
- Pagan, Adrian, 1996. "The econometrics of financial markets," Journal of Empirical Finance, Elsevier, vol. 3(1), pages 15-102, May.
- Klugman, Stuart A. & Parsa, Rahul, 1999. "Fitting bivariate loss distributions with copulas," Insurance: Mathematics and Economics, Elsevier, vol. 24(1-2), pages 139-148, March.
This item has more than 25 citations. To prevent cluttering this page, these citations are listed on a separate page. reading list or among the top items on IDEAS.Access and download statisticsgeneral information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (CCSD).
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.