Inhomogeneous dependency modelling with time varying copulae

Enzo Giacomini, Wolfgang Karl Härdle, Ekaterina Ignatieva and Vladimir Spokoiny

No 2006-075, SFB 649 Discussion Papers from Humboldt University Berlin, Collaborative Research Center 649: Economic Risk

Abstract: Measuring dependence in a multivariate time series is tantamount to modelling its dynamic structure in space and time. In the context of a multivariate normally distributed time series, the evolution of the covariance (or correlation) matrix over time describes this dynamic. A wide variety of applications, though, requires a modelling framework different from the multivariate normal. In risk management the non-normal behaviour of most financial time series calls for nonlinear (i.e. non-gaussian) dependency. The correct modelling of non-gaussian dependencies is therefore a key issue in the analysis of multivariate time series. In this paper we use copulae functions with adaptively estimated time varying parameters for modelling the distribution of returns, free from the usual normality assumptions. Further, we apply copulae to estimation of Value-at-Risk (VaR) of a portfolio and show its better performance over the RiskMetrics approach, a widely used methodology for VaR estimation.

Keywords: Value-at-Risk; time varying copula; adaptive estimation; nonparametric estimation (search for similar items in EconPapers)
JEL-codes: C14 (search for similar items in EconPapers)
Date: 2006
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Related works:
Journal Article: Inhomogeneous Dependence Modeling with Time-Varying Copulae (2009)
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