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Using Dynamic Copulae for Modeling Dependency in Currency Denominations of a Diversified World Stock Index
Company: Quantitative Finance Research Centre, University of Technology Sydney
Company Url: Click here to open
Year Of Publication: 2010
Month Of Publication: August
Pages: 39
Download Count: 10
View Count: 1692
Comment Num: 0
Language: English
Source: working paper
Who Can Read: Free
Date: 11-2-2010
Publisher: Administrator
Summary
The aim of this paper is to model the dependencya mong log-returns when security account prices are expressed in units of a well diversified world stock index. The paper uses the equi-weighted index EWI104s, calculated as the average of 104 world industry sector indices. The log-returns of its denominations in different currencies appear to be Student-t distributed with about four degrees of freedom. Motivated by these findings, the dependency in log-returns of currency denominations of the EWI104s is modeled using time-varying copulae, aiming to identify the best fitting copula family. The Student-t copula turns generally out to be superior to e.g. the Gaussian copula, where the dependence structure relates to the multivariate normal distribution. It is shown that merely changing the distributional assumption for the log-returns of the marginals from normal to Student-t leads to a significantly better fit. Furthermore, the Student-t copula with Student-t marginals is able to better capture dependent extreme values than the other models considered. Finally, the paper applies copulae to the estimation of the Value-at-Risk and the exp
Author(s)
Ignatieva, Katja Sign in to follow this author
Platen, Eckhard Sign in to follow this author
Rendek, Renata Sign in to follow this author
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