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Testing the Gaussian Copula Hypothesis for Financial Assets Dependences

  • Y. Malevergne

    (ISFA-Lyon and Univ. Nice/CNRS)

  • D. Sornette

    (Univ. Nice/CNRS and UCLA)

Using one of the key property of copulas that they remain invariant under an arbitrary monotonous change of variable, we investigate the null hypothesis that the dependence between financial assets can be modeled by the Gaussian copula. We find that most pairs of currencies and pairs of major stocks are compatible with the Gaussian copula hypothesis, while this hypothesis can be rejected for the dependence between pairs of commodities (metals). Notwithstanding the apparent qualification of the Gaussian copula hypothesis for most of the currencies and the stocks, a non-Gaussian copula, such as the Student's copula, cannot be rejected if it has sufficiently many ``degrees of freedom''. As a consequence, it may be very dangerous to embrace blindly the Gaussian copula hypothesis, especially when the correlation coefficient between the pair of asset is too high as the tail dependence neglected by the Gaussian copula can be as large as 0.6, i.e., three out five extreme events which occur in unison are missed.

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Paper provided by EconWPA in its series Finance with number 0111003.

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Length: 43 pages
Date of creation: 16 Nov 2001
Date of revision:
Handle: RePEc:wpa:wuwpfi:0111003
Note: Type of Document - LaTex; prepared on UNIX; pages: 43; figures: included 14 figures
Contact details of provider: Web page: http://128.118.178.162

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  1. Ilan Goldfajn & Taimur Baig, 1999. "Financial market contagion in the Asian crisis," Textos para discussão 400, Department of Economics PUC-Rio (Brazil).
  2. Graciela L. Kaminsky & Sergio L. Schmukler, 1999. "What triggers market jitters: a chronicle of the Asian crisis," International Finance Discussion Papers 634, Board of Governors of the Federal Reserve System (U.S.).
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  4. Starica, Catalin, 1999. "Multivariate extremes for models with constant conditional correlations," Journal of Empirical Finance, Elsevier, vol. 6(5), pages 515-553, December.
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  7. Richard B. Olsen & Ulrich A. Müller & Michel M. Dacorogna & Olivier V. Pictet & Rakhal R. Davé & Dominique M. Guillaume, 1997. "From the bird's eye to the microscope: A survey of new stylized facts of the intra-daily foreign exchange markets (*)," Finance and Stochastics, Springer, vol. 1(2), pages 95-129.
  8. Joshua Rosenberg, 1999. "Semiparametric Pricing of Multivariate Contingent Claims," New York University, Leonard N. Stern School Finance Department Working Paper Seires 99-028, New York University, Leonard N. Stern School of Business-.
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  11. Klugman, Stuart A. & Parsa, Rahul, 1999. "Fitting bivariate loss distributions with copulas," Insurance: Mathematics and Economics, Elsevier, vol. 24(1-2), pages 139-148, March.
  12. Umberto Cherubini & Elisa Luciano, 2002. "Multivariate Option Pricing with Copulas," ICER Working Papers - Applied Mathematics Series 05-2002, ICER - International Centre for Economic Research.
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