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Multivariate Dynamic Copula Models: Parameter Estimation and Forecast Evaluation

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  • Aepli, Matthias D.
  • Frauendorfer, Karl
  • Fuess, Roland
  • Paraschiv, Florentina

Abstract

This paper introduces multivariate dynamic copula models to account for the time-varying dependence structure in asset portfolios. We firstly enhance the flexibility of this structure by modeling regimes with multivariate mixture copulas. In our second approach, we derive dynamic elliptical copulas by applying the dynamic conditional correlation model (DCC) to multivariate elliptical copulas. The best-ranked copulas according to both in-sample fit and out-of-sample forecast performance indicate the importance of accounting for time-variation. The superiority of multivariate dynamic Clayton and Student-t models further highlight that positive tail dependence as well as the capability of capturing asymmetries in the dependence structure are crucial features of a well-fitting model for an equity portfolio.

Suggested Citation

  • Aepli, Matthias D. & Frauendorfer, Karl & Fuess, Roland & Paraschiv, Florentina, 2015. "Multivariate Dynamic Copula Models: Parameter Estimation and Forecast Evaluation," Working Papers on Finance 1513, University of St. Gallen, School of Finance.
  • Handle: RePEc:usg:sfwpfi:2015:13
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    File URL: http://ux-tauri.unisg.ch/RePEc/usg/sfwpfi/WPF-1513.pdf
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    References listed on IDEAS

    as
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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Multivariate dynamic copulas; regime-switching copulas; dynamic conditional correlation (DCC) model; forecast performance; tail dependence.;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods

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