The t copula with multiple parameters of degrees of freedom: bivariate characteristics and application to risk management

DOI10.1080/14697680903085544MaRDI QIDQ2994844zbMATH OpenOpenAlexFDO

Authors Xiaolin Luo, Pavel V. Shevchenko

Publication date 29 April 2011

Published in Quantitative Finance (Search for Journal in Brave)

Full work available at URL https://arxiv.org/abs/0710.3959

zbMATH Keywords

asymmetrytail dependencerisk managementgrouped \(t\) copula

Mathematics Subject Classification ID

Characterization and structure theory for multivariate probability distributions; copulas (62H05) Measures of association (correlation, canonical correlation, etc.) (62H20) Applications of statistics to actuarial sciences and financial mathematics (62P05)

Abstract: The t copula is often used in risk management as it allows for modelling tail dependence between risks and it is simple to simulate and calibrate. However, the use of a standard t copula is often criticized due to its restriction of having a single parameter for the degrees of freedom (dof) that may limit its capability to model the tail dependence structure in a multivariate case. To overcome this problem, grouped t copula was proposed recently, where risks are grouped a priori in such a way that each group has a standard t copula with its specific dof parameter. In this paper we propose the use of a grouped t copula, where each group consists of one risk factor only, so that a priori grouping is not required. The copula characteristics in the bivariate case are studied. We explain simulation and calibration procedures, including a simulation study on finite sample properties of the maximum likelihood estimators and Kendall's tau approximation. This new copula can be significantly different from the standard t copula in terms of risk measures such as tail dependence, value at risk and expected shortfall. Keywords: grouped t copula, tail dependence, risk management.

Recommendations

• \(t\)-copula from the viewpoint of tail dependence matrices
• The t Copula and Related Copulas
• Archimedean copulae for risk measurement
• Bayesian model choice of grouped \(t\)-copula
• Behaviour of multivariate tail dependence coefficients

Cites work

• Assessing the accuracy of the maximum likelihood estimator: Observed versus expected Fisher information
• Probability density decomposition for conditionally dependent random variables modeled by vines
• Sampling nested Archimedean copulas
• Tail dependence of skewed grouped \(t\)-distributions
• The t Copula and Related Copulas
• Vines -- a new graphical model for dependent random variables.

Cited in

(14)

• Copulae: an overview and recent developments
• Maximum likelihood estimation of skew-t copulas with its applications to stock returns
• Corrigendum to: ``Tail dependence of skewed grouped \(t\)-distributions
• \(t\)-copula from the viewpoint of tail dependence matrices
• Time-dependent copulas
• On Pearson-Kotz Dirichlet distributions
• Bayesian model choice of grouped \(t\)-copula
• Robust calibration of hierarchical population models for heterogeneous cell populations
• Jackknife empirical likelihood test for the equality of degrees of freedom in t-copulas
• Multivariate dependence modeling based on comonotonic factors
• Statistical Inference for a Relative Risk Measure
• The t Copula and Related Copulas
• A novel positive dependence property and its impact on a popular class of concordance measures
• Composite pseudo-likelihood estimation for pair-tractable copulas such as Archimedean, Archimax and related hierarchical extensions

Describes a project that uses

Uses Software

• QUADPACK
• QRM

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