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A copula test space model: How to avoid the wrong copula choice

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  • MICHIELS, Frederik
  • DE SCHEPPER, Ann

Abstract

We introduce and discuss the test space problem as a part of the whole copula fitting process. In particular, we explain how an efficient copula test space can be constructed by taking into account information about the existing dependence. Although our model is developed in a bivariate environment it can be used for higher dimensional copula fitting applications. This is shown on the 3 dimensional dependence structure of an illustrative porfolio containing the S&P 500 Composite Index, the JP Morgan Government Bond Index and the NAREIT All index.

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  • MICHIELS, Frederik & DE SCHEPPER, Ann, 2007. "A copula test space model: How to avoid the wrong copula choice," Working Papers 2007027, University of Antwerp, Faculty of Business and Economics.
    • Handle: RePEc:ant:wpaper:2007027
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    References listed on IDEAS

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    1. Bouye, Eric & Durlleman, Valdo & Nikeghbali, Ashkan & Riboulet, Gaël & Roncalli, Thierry, 2000. "Copulas for finance," MPRA Paper 37359, University Library of Munich, Germany.
    2. Robert T. Clemen & Terence Reilly, 1999. "Correlations and Copulas for Decision and Risk Analysis," Management Science, INFORMS, vol. 45(2), pages 208-224, February.
    3. Fermanian, Jean-David, 2005. "Goodness-of-fit tests for copulas," Journal of Multivariate Analysis, Elsevier, vol. 95(1), pages 119-152, July.
    4. Fathi Abid & Nader Naifar, 2005. "The Impact Of Stock Returns Volatility On Credit Default Swap Rates: A Copula Study," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 8(08), pages 1135-1155.
    5. Edward Frees & Emiliano Valdez, 1998. "Understanding Relationships Using Copulas," North American Actuarial Journal, Taylor & Francis Journals, vol. 2(1), pages 1-25.
    6. Kole, Erik & Koedijk, Kees & Verbeek, Marno, 2007. "Selecting copulas for risk management," Journal of Banking & Finance, Elsevier, vol. 31(8), pages 2405-2423, August.
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    Cited by:

    1. MICHIELS, Frederik & DE SCHEPPER, Ann, 2009. "Understanding copula transforms: A review of dependence properties," Working Papers 2009012, University of Antwerp, Faculty of Business and Economics.
    2. George Messinis, 2009. "Earnings and Languages in the Family: Second-Generation Australians," The Economic Record, The Economic Society of Australia, vol. 85(s1), pages 59-73, September.
    3. Frederik Michiels & Ann De Schepper, 2012. "How to improve the fit of Archimedean copulas by means of transforms," Statistical Papers, Springer, vol. 53(2), pages 345-355, May.

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    Keywords

    Copula; Kendall’s ?; Goodness-of-fit;
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