Inhomogeneous Dependency Modelling with Time Varying Copulae
AbstractMeasuring dependence in a multivariate time series is tantamount to modelling its dynamic structure in space and time. In the context of a multivariate normally distributed time series, the evolution of the covariance (or correlation) matrix over time describes this dynamic. A wide variety of applications, though, requires a modelling framework different from the multivariate normal. In risk management the non-normal behaviour of most financial time series calls for nonlinear (i.e. non-gaussian) dependency. The correct modelling of non-gaussian dependencies is therefore a key issue in the analysis of multivariate time series. In this paper we use copulae functions with adaptively estimated time varying parameters for modelling the distribution of returns, free from the usual normality assumptions. Further, we apply copulae to estimation of Value-at-Risk (VaR) of a portfolio and show its better performance over the RiskMetrics approach, a widely used methodology for VaR estimation.
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Bibliographic InfoPaper provided by Sonderforschungsbereich 649, Humboldt University, Berlin, Germany in its series SFB 649 Discussion Papers with number SFB649DP2006-075.
Length: 51 pages
Date of creation: Nov 2006
Date of revision:
Value-at-Risk; time varying copula; adaptive estimation; nonparametric estimation.;
Other versions of this item:
- Giacomini, Enzo & HÃƒÂ¤rdle, Wolfgang & Spokoiny, Vladimir, 2009. "Inhomogeneous Dependence Modeling with Time-Varying Copulae," Journal of Business & Economic Statistics, American Statistical Association, American Statistical Association, vol. 27(2), pages 224-234.
- C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
This paper has been announced in the following NEP Reports:
- NEP-ALL-2006-11-25 (All new papers)
- NEP-ECM-2006-11-25 (Econometrics)
- NEP-ETS-2006-11-25 (Econometric Time Series)
- NEP-RMG-2006-11-25 (Risk Management)
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.:
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