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The t copula with Multiple Parameters of Degrees of Freedom: Bivariate Characteristics and Application to Risk Management
Year Of Publication: 2009
Month Of Publication: March
Pages: 31
Download Count: 3
View Count: 1347
Comment Num: 0
Language: English
Source: working paper
Who Can Read: Free
Date: 11-30-2010
Publisher: Administrator
Summary
The t copula is often used in risk management as it allows for modelling tail dependence between risks and it is simple to simulate and calibrate. However, the use of a standard t copula is often criticized due to its restriction of having a single parameter for the degrees of freedom (dof) that may limit its capability to model the tail dependence structure in a multivariate case. To overcome this problem, grouped t copula was proposed recently, where risks are grouped a priori in such a way that each group has a standard t copula with its specific dof parameter. In this paper we propose the use of a grouped t copula, where each group consists of one risk factor only, so that a priori grouping is not required. The copula characteristics in the bivariate case are studied. We explain simulation and calibration procedures, including a simulation study on finite sample properties of the maximum likelihood estimators and Kendall’s tau approximation. This new copula can be significantly different from the standard t copula in terms of risk measures such as tail dependence, value at risk and expected shortfall
This document is published in Quantitative Finance (volume 10, number 9) November 2009, pp. 1039-1054.
http://www.dx.doi.org/10.1080/14697680903085544
Author(s)
Luo, Xiaolin Sign in to follow this author
Shevchenko, Pavel Sign in to follow this author
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