Mixture pair-copula-constructions

Gregor N.F. Weiß and Marcus Scheffer

Journal of Banking & Finance, 2015, vol. 54, issue C, 175-191

Abstract: We propose the use of convex combinations of parametric copulas as pair-copulas in high-dimensional vine copula models. By doing so, we circumvent the error-prone need to choose and estimate a parametric copula for each pair-copula in a vine model. We show in simulations that our proposed model fits the dependence structure in a given data sample significantly better than a competing benchmark. In our empirical study on the models’ accuracy for forecasting the Value-at-Risk of financial portfolios, we show that our proposed mixture pair-copula construction yields significantly better results in backtesting while the benchmark overestimates portfolio risk.

Keywords: Dependence structures; Vine copulas; Mixture copulas; Model selection (search for similar items in EconPapers)
JEL-codes: C52 C53 C58 (search for similar items in EconPapers)
Date: 2015
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (8)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:54:y:2015:i:c:p:175-191

DOI: 10.1016/j.jbankfin.2015.01.008

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