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Modeling International Financial Returns with a Multivariate Regime Switching Copula

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  • Chollete, Loran
  • Heinen, Andreas
  • Valdesogo, Alfonso

Abstract

In order to capture observed asymmetric dependence in international financial returns, we construct a multivariate regime-switching model of copulas. We model dependence with one Gaussian and one canonical vine copula regime. Canonical vines are constructed from bivariate conditional copulas and provide a very flexible way of characterizing 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 University Library of Munich, Germany in its series MPRA Paper with number 8114.

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Date of creation: Feb 2008
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Handle: RePEc:pra:mprapa:8114

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Keywords: Asymmetric dependence; Canonical vine copula; International returns; Regime-Switching; Risk Management; Value-at-Risk;

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