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Is a Normal Copula the Right Copula?

Dante Amengual and Enrique Sentana ()

Working Papers from CEMFI

Abstract: We derive computationally simple and intuitive expressions for score tests of Gaussian copulas against Generalised Hyperbolic alternatives, including symmetric and asymmetric Student t, and Hermite polynomial expansions. We decompose our tests into third and fourth moment components, and obtain one-sided Likelihood Ratio analogues, whose asymptotic distribution we provide. We conduct Monte Carlo exercises to assess the finite sample properties of asymptotic and bootstrap versions of our tests. In an empirical application to CRSP stocks, we find that short-term reversals and momentum effects are better captured by non-Gaussian copulas. We estimate their parameters by indirect inference, and devise successful trading strategies.

Keywords: Cokurtosis; coskewness; indirect inference; Kuhn-Tucker test; momentum strategies; non-linear dependence; short-term reversals; supremum test; underidentified parameters. (search for similar items in EconPapers)
JEL-codes: C12 C46 C52 G11 G14 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-mac
Date: 2015-08
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