Revisiting the Copula-Based Trading Method Using the Laplace Marginal Distribution Function

Tayyebeh Nadaf, Taher Lotfi and Stanford Shateyi
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Tayyebeh Nadaf: Department of Mathematics, Hamedan Branch, Islamic Azad University, Hamedan 1584743311, Iran
Taher Lotfi: Department of Mathematics, Hamedan Branch, Islamic Azad University, Hamedan 1584743311, Iran
Stanford Shateyi: Department of Mathematics and Applied Mathematics, School of Mathematical and Natural Sciences, University of Venda, P. Bag X5050, Thohoyandou 0950, South Africa

Mathematics, 2022, vol. 10, issue 5, 1-9

Abstract: Pairs trading under the copula approach is revisited in this paper. It is well known that financial returns arising from indices in markets may not follow the features of normal distribution and may exhibit asymmetry or fatter tails, in particular. Due to this, the Laplace distribution is employed in this work to fit the marginal distribution function, which will then be employed in a copula function. In fact, a multivariate copula function is constructed on two indices (based on the Laplace marginal distribution), enabling us to obtain the associated probabilities required for the process of pairs trade and creating an efficient tool for trading.

Keywords: copula; financial returns; pairs trade; Laplace distribution; CDF (search for similar items in EconPapers)
JEL-codes: C (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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