Modeling international financial returns with a multivariate regime switching copula
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.
|Date of creation:||01 Mar 2008|
|Date of revision:|
|Contact details of provider:|| Postal: |
Fax: +32 10474304
Web page: http://www.uclouvain.be/core
More information through EDIRC
References listed on IDEAS
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.:
- Guidolin, Massimo & Timmermann, Allan G, 2004.
"Term Structure of Risk Under Alternative Econometric Specifications,"
CEPR Discussion Papers
4645, C.E.P.R. Discussion Papers.
- Guidolin, Massimo & Timmermann, Allan, 2006. "Term structure of risk under alternative econometric specifications," Journal of Econometrics, Elsevier, vol. 131(1-2), pages 285-308.
- Massimo Guidolin & Allan Timmerman, 2005. "Term structure of risk under alternative econometric specifications," Working Papers 2005-001, Federal Reserve Bank of St. Louis.
- Andrew J. Patton, 2006. "Estimation of multivariate models for time series of possibly different lengths," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 21(2), pages 147-173.
- Allan Timmermann & Massimo Guidolin, 2006.
"An econometric model of nonlinear dynamics in the joint distribution of stock and bond returns,"
Journal of Applied Econometrics,
John Wiley & Sons, Ltd., vol. 21(1), pages 1-22.
- Massimo Guidolin & Allan Timmerman, 2005. "An econometric model of nonlinear dynamics in the joint distribution of stock and bond returns," Working Papers 2005-003, Federal Reserve Bank of St. Louis.
- Engle, Robert, 2002. "Dynamic Conditional Correlation: A Simple Class of Multivariate Generalized Autoregressive Conditional Heteroskedasticity Models," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(3), pages 339-50, July.
- Denis Pelletier, 2004.
"Regime Switching for Dynamic Correlations,"
Econometric Society 2004 North American Summer Meetings
230, Econometric Society.
- Engle, Robert F & Sheppard, Kevin K, 2001.
"Theoretical and Empirical Properties of Dynamic Conditional Correlation Multivariate GARCH,"
University of California at San Diego, Economics Working Paper Series
qt5s2218dp, Department of Economics, UC San Diego.
- Robert F. Engle & Kevin Sheppard, 2001. "Theoretical and Empirical properties of Dynamic Conditional Correlation Multivariate GARCH," NBER Working Papers 8554, National Bureau of Economic Research, Inc.
- Rodriguez, Juan Carlos, 2007. "Measuring financial contagion: A Copula approach," Journal of Empirical Finance, Elsevier, vol. 14(3), pages 401-423, June.
- Massimo Guidolin & Allan Timmermann, 2008.
"International asset allocation under regime switching, skew, and kurtosis preferences,"
Review of Financial Studies,
Society for Financial Studies, vol. 21(2), pages 889-935, April.
- Massimo Guidolin & Allan Timmerman, 2006. "International asset allocation under regime switching, skew and kurtosis preferences," Working Papers 2005-034, Federal Reserve Bank of St. Louis.
- Berkowitz, Jeremy, 2001. "Testing Density Forecasts, with Applications to Risk Management," Journal of Business & Economic Statistics, American Statistical Association, vol. 19(4), pages 465-74, October.
- Alexandra Dias & Paul Embrechts, 2004. "Dynamic copula models for multivariate high-frequency data in finance," Working Papers wpn04-01, Warwick Business School, Finance Group.
- Hansen, Bruce E, 1994.
"Autoregressive Conditional Density Estimation,"
International Economic Review,
Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 35(3), pages 705-30, August.
- Hansen, B.E., 1992. "Autoregressive Conditional Density Estimation," RCER Working Papers 322, University of Rochester - Center for Economic Research (RCER).
- Tom Doan, . "RATS programs to replicate Hansen's GARCH models with time-varying t-densities," Statistical Software Components RTZ00086, Boston College Department of Economics.
- Andrew Patton, 2004.
"Modelling Asymmetric Exchange Rate Dependence,"
wp04-04, Warwick Business School, Finance Group.
- Das, Sanjiv Ranjan & Uppal, Raman, 2002.
"Systemic Risk and International Portfolio Choice,"
CEPR Discussion Papers
3305, C.E.P.R. Discussion Papers.
- Hamilton, James D, 1989. "A New Approach to the Economic Analysis of Nonstationary Time Series and the Business Cycle," Econometrica, Econometric Society, vol. 57(2), pages 357-84, March.
- Garcia, René & Tsafack, Georges, 2011.
"Dependence structure and extreme comovements in international equity and bond markets,"
Journal of Banking & Finance,
Elsevier, vol. 35(8), pages 1954-1970, August.
- René Garcia & Georges Tsafack, 2009. "Dependence Structure and Extreme Comovements in International Equity and Bond Markets," CIRANO Working Papers 2009s-21, CIRANO.
- Andrew J. Patton, 2002.
"On the out-of-sample importance of skewness and asymetric dependence for asset allocation,"
LSE Research Online Documents on Economics
24951, London School of Economics and Political Science, LSE Library.
- Andrew J. Patton, 2004. "On the Out-of-Sample Importance of Skewness and Asymmetric Dependence for Asset Allocation," Journal of Financial Econometrics, Society for Financial Econometrics, vol. 2(1), pages 130-168.
- Ramchand, Latha & Susmel, Raul, 1998. "Volatility and cross correlation across major stock markets," Journal of Empirical Finance, Elsevier, vol. 5(4), pages 397-416, October.
- Jondeau, Eric & Rockinger, Michael, 2006. "The Copula-GARCH model of conditional dependencies: An international stock market application," Journal of International Money and Finance, Elsevier, vol. 25(5), pages 827-853, August.
- Okimoto, Tatsuyoshi, 2008. "New Evidence of Asymmetric Dependence Structures in International Equity Markets," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 43(03), pages 787-815, September.
- François Longin, 2001. "Extreme Correlation of International Equity Markets," Journal of Finance, American Finance Association, vol. 56(2), pages 649-676, 04.
- Andrew Ang & Geert Bekaert, 2002. "International Asset Allocation With Regime Shifts," Review of Financial Studies, Society for Financial Studies, vol. 15(4), pages 1137-1187.
- Andrew Ang & Geert Bekaert, 1998.
"Regime Switches in Interest Rates,"
NBER Working Papers
6508, National Bureau of Economic Research, Inc.
- Ang, Andrew & Chen, Joseph, 2002. "Asymmetric correlations of equity portfolios," Journal of Financial Economics, Elsevier, vol. 63(3), pages 443-494, March.
When requesting a correction, please mention this item's handle: RePEc:cor:louvco:2008013. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Alain GILLIS)
If references are entirely missing, you can add them using this form.