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Regime switches in the dependence structure of multidimensional financial data

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  • Stöber, Jakob
  • Czado, Claudia

Abstract

Misperceptions about extreme dependencies between different financial assets have been an important element of the recent financial crisis, which is why regulating entities do now require financial institutions to account for different behavior under market stress. Such sudden switches in dependence structures are studied using Markov switching regular vine copulas. These copulas allow for asymmetric dependencies and tail dependencies in high dimensional data. Methods for fast maximum likelihood as well as Bayesian inference are developed. The algorithms are validated in simulations and applied to financial data. The results show that regime switches are present in the dependence structure and that regime switching models provide tools for the accurate description of inhomogeneity during times of crisis.

Suggested Citation

  • Stöber, Jakob & Czado, Claudia, 2014. "Regime switches in the dependence structure of multidimensional financial data," Computational Statistics & Data Analysis, Elsevier, vol. 76(C), pages 672-686.
    • Handle: RePEc:eee:csdana:v:76:y:2014:i:c:p:672-686
    DOI: 10.1016/j.csda.2013.04.002
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    3. Overbeck Ludger & Schmidt Wolfgang M., 2015. "Multivariate Markov Families of Copulas," Dependence Modeling, De Gruyter, vol. 3(1), pages 1-13, October.
    4. Derumigny Alexis & Fermanian Jean-David, 2017. "About tests of the “simplifying” assumption for conditional copulas," Dependence Modeling, De Gruyter, vol. 5(1), pages 154-197, August.
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    8. Holzmann, Hajo & Schwaiger, Florian, 2016. "Testing for the number of states in hidden Markov models," Computational Statistics & Data Analysis, Elsevier, vol. 100(C), pages 318-330.
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    10. Su, Xiaoshan & Bai, Manying & Han, Yingwei, 2021. "Robust portfolio selection with regime switching and asymmetric dependence," Economic Modelling, Elsevier, vol. 99(C).
    11. Kjersti Aas, 2016. "Pair-Copula Constructions for Financial Applications: A Review," Econometrics, MDPI, vol. 4(4), pages 1-15, October.
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