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Modeling International Financial Returns with a Multivariate Regime-switching Copula
Open accessAbstract
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 three 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, since it modifies the Value-at-Risk (VaR) of international portfolios and produces a better out-of-sample performance. Third, ignoring asymmetric dependence and regime-switching in portfolio selection leads to significant costs for an investor.
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A review of copula models for economic time series
Patton, A. J. (2012) · Journal of Multivariate Analysis · doi:10.1016/j.jmva.2012.02.021 · Cited by 584
Modeling Dependence with C- and D-Vine Copulas: The R Package CDVine
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Copula Methods for Forecasting Multivariate Time Series
Patton, A. (2013) · Handbook of Economic Forecasting · doi:10.1016/b978-0-444-62731-5.00016-6 · Cited by 320
Dependence structure and extreme comovements in international equity and bond markets
Garcia, R., & Tsafack, G. (2011) · Journal of Banking & Finance · doi:10.1016/j.jbankfin.2011.01.003 · Cited by 267
Metadata
- Authors
- Chollete, L., Heinen, A., & Valdesogo, A.
- Venue
- Journal of Financial Econometrics
- Publisher
- Oxford University Press (OUP)
- Published
- 2009-09-15
- Volume
- 7
- Issue
- 4
- Pages
- 437-480
- ISSN
- 1479-8409 (ISSN-L)
- 1479-8417
- OpenAlex
- W1914840709
- Cited by
- 292
- References
- 46
- FWCI
- 29.13
- Type
- journal article
- Language
- en
- Open access
- green
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