Modeling International Financial Returns with a Multivariate Regime Switching Copula

Lorán Chollete (), Andréas Heinen and Alfonso Valdesogo Robles
Additional contact information
Lorán Chollete: Dept. of Finance and Management Science, Norwegian School of Economics and Business Administration, Postal: NHH , Department of Finance and Management Science, Helleveien 30, N-5045 Bergen, Norway, http://www.nhh.no/Default.aspx?ID=2016

No 2008/3, Discussion Papers from Norwegian School of Economics, Department of Business and Management Science

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)
Pages: 43 pages
Date: 2008-03-12
New Economics Papers: this item is included in nep-rmg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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