Conditional Dependence Modelling with Regular Vine Copulas
Peter Mwita and
Journal of Statistical and Econometric Methods, 2019, vol. 8, issue 1, 5
Modelling sophisticated high-dimensional dependence structures forÂ financial assets in a portfolio framework require flexible dependenceÂ models. In this paper, a regular vine-copula based model is employed toÂ analyze financial dependencies and co-movements of a six-dimensionalÂ portfolio of currency exchange rates starting from January 2001 to AprilÂ 2018. The regular-vine copula based model employs partial correlationsÂ to construct the regular vine structure and offer superior flexibility inÂ the selection of the distributions to model financial dependence structure.Â The model also captures the asymmetry between multivariateÂ variables using bivariate copulas with flexible tail dependence. EmpiricalÂ evidence suggests that co-movements in currency markets are mostÂ likely to experience a crash and boom together thus, concluding thatÂ currency markets are integrated due to the nature of the global financialÂ systems. The C-Vine copula specification is favoured over the other copula specifications in modeling the dependence dynamics between currencyÂ exchange rates.Mathematics Subject Classification: 62H20, 62H12Keywords: Copula; regular vines; C-Vine, D-Vine; currency exchange rates;Â tail dependence; pair-copula constructions.
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