A goodness-of-fit test for copulas based on martingale transformation

Xiaohui Lu and Xu Zheng

Journal of Econometrics, 2020, vol. 215, issue 1, 84-117

Abstract: This paper proposes an asymptotically distribution-free test for copulas with dynamic marginal distributions, such as GARCH and ARMA processes. The test is based on the empirical copula process with parametrically estimated marginal distributions. By applying the Khmaladze (1982, 1988, 1993) martingale transformation method, the transformed empirical process converges to a standard Gaussian process, so the resulting test statistics are asymptotically distribution-free. Monte Carlo simulations show that the test performs well in finite samples. An empirical application to test copulas between EUR/USD and GBP/USD exchange rates is provided.

Keywords: Copula; Goodness-of-fit test; Martingale transformation; Distribution-free test (search for similar items in EconPapers)
JEL-codes: C14 C32 (search for similar items in EconPapers)
Date: 2020
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Persistent link: https://EconPapers.repec.org/RePEc:eee:econom:v:215:y:2020:i:1:p:84-117

DOI: 10.1016/j.jeconom.2019.08.007

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