A Natural Copula

Peter B. Lerner

Papers from arXiv.org

Abstract: Copulas are widely used in financial economics as well as in other areas of applied mathematics. Yet, there is much arbitrariness in their choice. The author proposes "a natural copula" concept, which minimizes Wasserstein distance between distributions in some space, in which both these distributions are embedded. Transport properties and hydrodynamic interpretation are discussed with two examples of distributions of financial significance. A natural copula can be parsimoniously estimated by the methods of linear programming.

Date: 2023-04, Revised 2023-11
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