Is a Normal Copula the Right Copula?

Dante Amengual and Enrique Sentana

Journal of Business & Economic Statistics, 2020, vol. 38, issue 2, 350-366

Abstract: We derive computationally simple and intuitive expressions for score tests of Gaussian copulas against generalized hyperbolic alternatives, including symmetric and asymmetric Student t, and many other examples. We decompose our tests into third and fourth moment components, and obtain one-sided Likelihood Ratio analogs, whose standard asymptotic distribution we provide. Our Monte Carlo exercises confirm the reliable size of parametric bootstrap versions of our tests, and their substantial power gains over alternative procedures. In an empirical application to CRSP stocks, we find that short-term reversals and momentum effects are better captured by non-Gaussian copulas, whose parameters we estimate by indirect inference. Supplementary materials for this article are available online.

Date: 2020
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Related works:
Working Paper: Is a Normal Copula the Right Copula? (2015)
Working Paper: Is a normal copula the right copula? (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:taf:jnlbes:v:38:y:2020:i:2:p:350-366

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DOI: 10.1080/07350015.2018.1505631

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