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Multivariate Copula Models at Work: Outperforming the desert island copula?

Author

Listed:
  • Fischer, Matthias J.
  • Köck, Christian
  • Schlüter, Stephan
  • Weigert, Florian

Abstract

Since the pioneering work of Embrechts and co-authors in 1999, copula models enjoy steadily increasing popularity in finance. Whereas copulas are well-studied in the bivariate case, the higher-dimensional case still offers several open issues and it is by far not clear how to construct copulas which sufficiently capture the characteristics of financial returns. For this reason, elliptical copulas (i.e. Gaussian and Student-t copula) still dominate both empirical and practical applications. On the other hand, several attractive construction schemes appeared in the recent literature prom sing flexible but still manageable dependence models. The aim of this work is to empirically investigate whether these models are really capable to outperform its benchmark, i.e. the Student-t copula (which is termed by Paul Embrechts as "desert island copula" on account of its excellent fit to financial returns) and, in addition, to compare the fit of these different copula classes among themselves.

Suggested Citation

  • Fischer, Matthias J. & Köck, Christian & Schlüter, Stephan & Weigert, Florian, 2007. "Multivariate Copula Models at Work: Outperforming the desert island copula?," Discussion Papers 79/2007, Friedrich-Alexander University Erlangen-Nuremberg, Chair of Statistics and Econometrics.
  • Handle: RePEc:zbw:faucse:792007
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    References listed on IDEAS

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    1. W. Breymann & A. Dias & P. Embrechts, 2003. "Dependence structures for multivariate high-frequency data in finance," Quantitative Finance, Taylor & Francis Journals, vol. 3(1), pages 1-14.
    2. Paola Palmitesta & Corrado Provasi, 2005. "Aggregation of Dependent Risks Using the Koehler–Symanowski Copula Function," Computational Economics, Springer;Society for Computational Economics, vol. 25(1), pages 189-205, February.
    3. Koehler, K. J. & Symanowski, J. T., 1995. "Constructing Multivariate Distributions with Specific Marginal Distributions," Journal of Multivariate Analysis, Elsevier, vol. 55(2), pages 261-282, November.
    4. Patricia Mariela Morillas, 2005. "A method to obtain new copulas from a given one," Metrika: International Journal for Theoretical and Applied Statistics, Springer, vol. 61(2), pages 169-184, April.
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    Cited by:

    1. Dominique Guegan & Pierre-André Maugis, 2010. "An Econometric Study of Vine Copulas," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-00492124, HAL.
    2. Hobæk Haff, Ingrid & Aas, Kjersti & Frigessi, Arnoldo, 2010. "On the simplified pair-copula construction -- Simply useful or too simplistic?," Journal of Multivariate Analysis, Elsevier, vol. 101(5), pages 1296-1310, May.
    3. repec:hal:journl:halshs-00645799 is not listed on IDEAS

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