The Role of Copulas in the Housing Crisis

David Zimmer

The Review of Economics and Statistics, 2012, vol. 94, issue 2, 607-620

Abstract: Due to its simplicity and familiarity, the Gaussian copula is popular in calculating risk in collaterized debt obligations, but it imposes asymptotic independence such that extreme events appear to be unrelated. This restriction might be innocuous in normal times, but during extreme events, such as the housing crisis, the Gaussian copula might be inappropriate. This paper explores various copula specifications and finds that the degree to which housing prices are related based on the Gaussian copula is too small compared with real housing price data. © 2012 The President and Fellows of Harvard College and the Massachusetts Institute of Technology.

Keywords: Clayton; Gumbel; CDO; conditional probability; dependence; bubble; contagion (search for similar items in EconPapers)
JEL-codes: C32 G21 G24 (search for similar items in EconPapers)
Date: 2012
References: Add references at CitEc
Citations: View citations in EconPapers (44)

Downloads: (external link)
http://www.mitpressjournals.org/doi/pdf/10.1162/REST_a_00172 link to full text PDF (application/pdf)
Access to full text is restricted to subscribers.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:tpr:restat:v:94:y:2012:i:2:p:607-620

Ordering information: This journal article can be ordered from
https://mitpressjour ... rnal/?issn=0034-6535

Access Statistics for this article

The Review of Economics and Statistics is currently edited by Pierre Azoulay, Olivier Coibion, Will Dobbie, Raymond Fisman, Benjamin R. Handel, Brian A. Jacob, Kareen Rozen, Xiaoxia Shi, Tavneet Suri and Yi Xu

More articles in The Review of Economics and Statistics from MIT Press
Bibliographic data for series maintained by The MIT Press ().