Modelling 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 copula. We model dependence with one Gaussian and one canonical vine copula regime. Canonical vines are construted from bivariate conditional copulas and provide a very flexible way of characterizig 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.