Perturbed Gaussian copula

Jean-Pierre Fouque and Xianwen Zhou

A chapter in Econometrics and Risk Management, 2008, pp 103-121 from Emerald Group Publishing Limited

Abstract: Gaussian copula is by far the most popular copula used in the financial industry in default dependency modeling. However, it has a major drawback – it does not exhibit tail dependence, a very important property for copula. The essence of tail dependence is the interdependence when extreme events occur, say, defaults of corporate bonds. In this paper, we show that some tail dependence can be restored by introducing stochastic volatility on a Gaussian copula. Using perturbation methods we then derive an approximate copula – called perturbed Gaussian copula in this paper.

Date: 2008
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Persistent link: https://EconPapers.repec.org/RePEc:eme:aecozz:s0731-9053(08)22005-0

DOI: 10.1016/S0731-9053(08)22005-0

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