Testing the Gaussian Copula Hypothesis for Financial Assets Dependences

Yannick Malevergne and D. Sornette
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D. Sornette: Univ. Nice/CNRS and UCLA

Finance from University Library of Munich, Germany

Abstract: Using one of the key property of copulas that they remain invariant under an arbitrary monotonous change of variable, we investigate the null hypothesis that the dependence between financial assets can be modeled by the Gaussian copula. We find that most pairs of currencies and pairs of major stocks are compatible with the Gaussian copula hypothesis, while this hypothesis can be rejected for the dependence between pairs of commodities (metals). Notwithstanding the apparent qualification of the Gaussian copula hypothesis for most of the currencies and the stocks, a non-Gaussian copula, such as the Student's copula, cannot be rejected if it has sufficiently many ``degrees of freedom''. As a consequence, it may be very dangerous to embrace blindly the Gaussian copula hypothesis, especially when the correlation coefficient between the pair of asset is too high as the tail dependence neglected by the Gaussian copula can be as large as 0.6, i.e., three out five extreme events which occur in unison are missed.

Keywords: Copulas; Dependence Modelisation; Risk Management; Tail Dependence. (search for similar items in EconPapers)
JEL-codes: C12 C15 F31 G19 (search for similar items in EconPapers)
Pages: 43 pages
Date: 2001-11-16
New Economics Papers: this item is included in nep-ecm
Note: Type of Document - LaTex; prepared on UNIX; pages: 43; figures: included 14 figures
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

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Related works:
Journal Article: Testing the Gaussian copula hypothesis for financial assets dependences (2003)
Working Paper: Testing the Gaussian copula hypothesis for financial assets dependences (2003)
Working Paper: Testing the Gaussian copula hypothesis for financial assets dependence (2003)
Working Paper: Testing the Gaussian Copula Hypothesis for Financial Assets Dependences (2001)
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