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Tracking a changing copula

  • Harvey, Andrew

A copula models the relationships between variables independently of their marginal distributions. When the variables are time series, the copula may change over time. Recursive procedures based on indicator variables are proposed for tracking these changes over time. Estimation of the unknown parameters is by maximum likelihood. When the marginal distributions change, pre-filtering is necessary before constructing the indicator variables on which the recursions are based. This entails estimating time-varying quantiles and a simple method based on time-varying histograms is proposed. The techniques are applied to the Hong Kong and Korean stock market indices. Some interesting and unexpected movements are detected, particularly after the attack on the Hong Kong dollar in 1997.

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Article provided by Elsevier in its journal Journal of Empirical Finance.

Volume (Year): 17 (2010)
Issue (Month): 3 (June)
Pages: 485-500

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Handle: RePEc:eee:empfin:v:17:y:2010:i:3:p:485-500
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  1. Andersen, Torben G. & Bollerslev, Tim & Christoffersen, Peter F. & Diebold, Francis X., 2006. "Volatility and Correlation Forecasting," Handbook of Economic Forecasting, Elsevier.
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  8. Rodriguez, Juan Carlos, 2007. "Measuring financial contagion: A Copula approach," Journal of Empirical Finance, Elsevier, vol. 14(3), pages 401-423, June.
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  13. Jean-David FERMANIAN & Olivier SCAILLET, 2003. "Nonparametric Estimation of Copulas for Time Series," FAME Research Paper Series rp57, International Center for Financial Asset Management and Engineering.
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