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Out-of-sample comparison of copula specifications in multivariate density forecasts

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Author Info

  • Cees Diks

    () (University of Amsterdam)

  • Valentyn Panchenko

    () (School of Economics, University of New South Wales)

  • Dick van Dijk

    () (Econometric Institute, Erasmus University Rotterdam)

Abstract

We introduce a statistical test for comparing the predictive accuracy of competing copula specifications in multivariate density forecasts, based on the Kullback-Leibler Information Criterion (KLIC). The test is valid under general conditions: in particular it allows for parameter estimation uncertainty and for the copulas to be nested or nonnested. Monte Carlo simulations demonstrate that the proposed test has satisfactory size and power properties in finite samples. Applying the test to daily exchange rate returns of several major currencies against the US dollar we find that the Student’s t copula is favored over Gaussian, Gumbel and Clayton copulas. This suggests that these exchange rate returns are characterized by symmetric tail dependence.

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Bibliographic Info

Paper provided by School of Economics, The University of New South Wales in its series Discussion Papers with number 2008-23.

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Length: 27 pages
Date of creation: Oct 2008
Date of revision:
Handle: RePEc:swe:wpaper:2008-23

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Keywords: Copula-based density forecast; semiparametric statistics; out-of-sample forecast evaluation; Kullback-Leibler Information Criterion; empirical copula;

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References

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Citations

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Cited by:
  1. Diaa Noureldin & Neil Shephard & Kevin Sheppard, 2011. "Multivariate High-Frequency-Based Volatility (HEAVY) Models," Economics Papers 2011-W01, Economics Group, Nuffield College, University of Oxford.
  2. Hayette Gatfaoui, 2010. "Investigating the dependence structure between credit default swap spreads and the U.S. financial market," Annals of Finance, Springer, vol. 6(4), pages 511-535, October.
  3. Weiß, Gregor N.F., 2011. "Are Copula-GoF-tests of any practical use? Empirical evidence for stocks, commodities and FX futures," The Quarterly Review of Economics and Finance, Elsevier, vol. 51(2), pages 173-188, May.
  4. Marc Gronwald & Janina Ketterer & Stefan Trück, 2011. "The Dependence Structure between Carbon Emission Allowances and Financial Markets - A Copula Analysis," CESifo Working Paper Series 3418, CESifo Group Munich.
  5. Jean-David Fermanian, 2012. "An overview of the goodness-of-fit test problem for copulas," Papers 1211.4416, arXiv.org.

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