Modeling international financial returns with a multivariate regime switching copula

Loran Chollete, Andréas Heinen and Alfonso Valdesogo Robles
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Loran Chollete: Norwegian School of Economics and Business Administration (NHH)

No 2008013, LIDAM Discussion Papers CORE from Université catholique de Louvain, Center for Operations Research and Econometrics (CORE)

Abstract: In order to capture observed asymmetric dependence in international financial returns, we construct a multivariate regime-switching model of copulas. We model dependence with one Gaussian and one canonical vine copula regime. Canonical vines are constructed from bivariate conditional copulas and provide a very flexible way of characterizing dependence in multivariate settings. We apply the model to returns from the G5 and Latin American regions, and document two main findings. First, we discover that models with canonical vines generally dominate alternative dependence structures. Second, the choice of copula is important for risk management, because it modifies the Value at Risk (VaR) of international portfolio returns.

Keywords: asymmetric dependence; canonical vine copula; international returns; regime-switching; risk management; Value-at-Risk. (search for similar items in EconPapers)
JEL-codes: C32 C35 G10 (search for similar items in EconPapers)
Date: 2008-03-01
New Economics Papers: this item is included in nep-rmg
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Citations: View citations in EconPapers (2)

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Related works:
Journal Article: Modeling International Financial Returns with a Multivariate Regime-switching Copula (2009)
Working Paper: Modelling international financial returns with a multivariate regime switching copula (2008)
Working Paper: Modeling International Financial Returns with a Multivariate Regime Switching Copula (2008)
Working Paper: Modeling International Financial Returns with a Multivariate Regime Switching Copula (2008)
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