IDEAS home Printed from https://ideas.repec.org/a/eee/phsmap/v355y2005i1p176-182.html
   My bibliography  Save this article

Goodness-of-fit test for copulas

Author

Listed:
  • Panchenko, Valentyn

Abstract

Copulas are often used in finance to characterize the dependence between assets. However, a choice of the functional form for the copula is an open question in the literature. This paper develops a goodness-of-fit test for copulas based on positive definite bilinear forms. The suggested test avoids the use of plug-in estimators that is the common practice in the literature. The test statistics can be consistently computed on the basis of V-estimators even in the case of large dimensions. The test is applied to a dataset of US large cap stocks to assess the performance of the Gaussian copula for the portfolios of assets of various dimension. The Gaussian copula appears to be inadequate to characterize the dependence between assets.

Suggested Citation

  • Panchenko, Valentyn, 2005. "Goodness-of-fit test for copulas," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 355(1), pages 176-182.
    • Handle: RePEc:eee:phsmap:v:355:y:2005:i:1:p:176-182
    DOI: 10.1016/j.physa.2005.02.081
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0378437105002906
    Download Restriction: Full text for ScienceDirect subscribers only. Journal offers the option of making the article available online on Science direct for a fee of $3,000
    File URL: https://libkey.io/10.1016/j.physa.2005.02.081?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to look for a different version below or search for a different version of it.

    Other versions of this item:

    References listed on IDEAS

    as
    1. Y. Malevergne & D. Sornette, 2003. "Testing the Gaussian copula hypothesis for financial assets dependences," Quantitative Finance, Taylor & Francis Journals, vol. 3(4), pages 231-250.
    2. Chen, Xiaohong & Fan, Yanqin & Patton, Andrew J., 2004. "Simple tests for models of dependence between multiple financial time series, with applications to U.S. equity returns and exchange rates," LSE Research Online Documents on Economics 24681, London School of Economics and Political Science, LSE Library.
    3. Yanqin Fan & Xiaohong Chen & Andrew Patton, 2004. "(IAM Series No 003) Simple Tests for Models of Dependence Between Multiple Financial Time Series, with Applications to U.S. Equity Returns and Exchange Rates," FMG Discussion Papers dp483, Financial Markets Group.
    4. C. W. Granger & E. Maasoumi & J. Racine, 2004. "A Dependence Metric for Possibly Nonlinear Processes," Journal of Time Series Analysis, Wiley Blackwell, vol. 25(5), pages 649-669, September.
    5. Mark B. Wise & Vineer Bhansali, 2002. "Implications of Correlated Default For Portfolio Allocation To Corporate Bonds," Papers nlin/0209010, arXiv.org.
    6. Bouye, Eric & Durlleman, Valdo & Nikeghbali, Ashkan & Riboulet, Gaël & Roncalli, Thierry, 2000. "Copulas for finance," MPRA Paper 37359, University Library of Munich, Germany.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Fernandez, Viviana, 2008. "Copula-based measures of dependence structure in assets returns," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 387(14), pages 3615-3628.
    2. Diermanse, F.L.M. & Geerse, C.P.M., 2012. "Correlation models in flood risk analysis," Reliability Engineering and System Safety, Elsevier, vol. 105(C), pages 64-72.
    3. Steffen Grønneberg & Nils Lid Hjort, 2014. "The Copula Information Criteria," Scandinavian Journal of Statistics, Danish Society for Theoretical Statistics;Finnish Statistical Society;Norwegian Statistical Association;Swedish Statistical Association, vol. 41(2), pages 436-459, June.
    4. Zhang, Shulin & Okhrin, Ostap & Zhou, Qian M. & Song, Peter X.-K., 2016. "Goodness-of-fit test for specification of semiparametric copula dependence models," Journal of Econometrics, Elsevier, vol. 193(1), pages 215-233.
    5. Claudia Klüppelberg & Gabriel Kuhn, 2009. "Copula structure analysis," Journal of the Royal Statistical Society Series B, Royal Statistical Society, vol. 71(3), pages 737-753, June.
    6. Jean-David Fermanian, 2012. "An overview of the goodness-of-fit test problem for copulas," Papers 1211.4416, arXiv.org.
    7. Sabyasachi Guharay & KC Chang & Jie Xu, 2017. "Robust Estimation of Value-at-Risk through Distribution-Free and Parametric Approaches Using the Joint Severity and Frequency Model: Applications in Financial, Actuarial, and Natural Calamities Domain," Risks, MDPI, vol. 5(3), pages 1-30, July.
    8. Kallenberg, Wilbert C.M., 2008. "Modelling dependence," Insurance: Mathematics and Economics, Elsevier, vol. 42(1), pages 127-146, February.
    9. Diks, Cees & Panchenko, Valentyn & van Dijk, Dick, 2010. "Out-of-sample comparison of copula specifications in multivariate density forecasts," Journal of Economic Dynamics and Control, Elsevier, vol. 34(9), pages 1596-1609, September.
    10. Genest, Christian & Rémillard, Bruno & Beaudoin, David, 2009. "Goodness-of-fit tests for copulas: A review and a power study," Insurance: Mathematics and Economics, Elsevier, vol. 44(2), pages 199-213, April.
    11. Wang, Zong-Run & Chen, Xiao-Hong & Jin, Yan-Bo & Zhou, Yan-Ju, 2010. "Estimating risk of foreign exchange portfolio: Using VaR and CVaR based on GARCH–EVT-Copula model," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 389(21), pages 4918-4928.
    12. Zhu, Hui-Ming & Li, Rong & Li, Sufang, 2014. "Modelling dynamic dependence between crude oil prices and Asia-Pacific stock market returns," International Review of Economics & Finance, Elsevier, vol. 29(C), pages 208-223.
    13. Muteba Mwamba, John & Mokwena, Paula, 2013. "International diversification and dependence structure of equity portfolios during market crashes: the Archimedean copula approach," MPRA Paper 64384, University Library of Munich, Germany.
    14. Marc Gronwald & Janina Ketterer & Stefan Trück, 2011. "The Dependence Structure between Carbon Emission Allowances and Financial Markets - A Copula Analysis," CESifo Working Paper Series 3418, CESifo.
    15. Wanling Huang & Artem Prokhorov, 2014. "A Goodness-of-fit Test for Copulas," Econometric Reviews, Taylor & Francis Journals, vol. 33(7), pages 751-771, October.
    16. Denecke, Liesa & Müller, Christine H., 2011. "Robust estimators and tests for bivariate copulas based on likelihood depth," Computational Statistics & Data Analysis, Elsevier, vol. 55(9), pages 2724-2738, September.
    17. Yiran Chen & Giray Ökten, 2022. "A goodness-of-fit test for copulas based on the collision test," Statistical Papers, Springer, vol. 63(5), pages 1369-1385, October.
    18. Bruno Rémillard, 2017. "Goodness-of-Fit Tests for Copulas of Multivariate Time Series," Econometrics, MDPI, vol. 5(1), pages 1-23, March.
    19. Fantazzini, Dean, 2011. "Analysis of multidimensional probability distributions with copula functions. III," Applied Econometrics, Russian Presidential Academy of National Economy and Public Administration (RANEPA), vol. 24(4), pages 100-130.
    20. Shulin Zhang & Qian M. Zhou & Huazhen Lin, 2021. "Goodness-of-fit test of copula functions for semi-parametric univariate time series models," Statistical Papers, Springer, vol. 62(4), pages 1697-1721, August.
    21. Kallenberg, Wilbert C.M., 2009. "Estimating copula densities, using model selection techniques," Insurance: Mathematics and Economics, Elsevier, vol. 45(2), pages 209-223, October.
    22. Xi, Zhimin & Jing, Rong & Wang, Pingfeng & Hu, Chao, 2014. "A copula-based sampling method for data-driven prognostics," Reliability Engineering and System Safety, Elsevier, vol. 132(C), pages 72-82.
    23. repec:hum:wpaper:sfb649dp2013-041 is not listed on IDEAS
    24. Noureddine Benlagha, 2014. "Dependence structure between nominal and index-linked bond returns: a bivariate copula and DCC-GARCH approach," Applied Economics, Taylor & Francis Journals, vol. 46(31), pages 3849-3860, November.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Kole, Erik & Koedijk, Kees & Verbeek, Marno, 2007. "Selecting copulas for risk management," Journal of Banking & Finance, Elsevier, vol. 31(8), pages 2405-2423, August.
    2. Fantazzini, Dean, 2011. "Analysis of multidimensional probability distributions with copula functions," Applied Econometrics, Russian Presidential Academy of National Economy and Public Administration (RANEPA), vol. 22(2), pages 98-134.
    3. Oriol Roch Casellas & Antonio Alegre Escolano, 2005. "Testing the bivariate distribution of daily equity returns using copulas. An application to the Spanish stock market," Working Papers in Economics 143, Universitat de Barcelona. Espai de Recerca en Economia.
    4. Jean-David Fermanian, 2012. "An overview of the goodness-of-fit test problem for copulas," Papers 1211.4416, arXiv.org.
    5. Roch, Oriol & Alegre, Antonio, 2006. "Testing the bivariate distribution of daily equity returns using copulas. An application to the Spanish stock market," Computational Statistics & Data Analysis, Elsevier, vol. 51(2), pages 1312-1329, November.
    6. Grundke, Peter & Polle, Simone, 2012. "Crisis and risk dependencies," European Journal of Operational Research, Elsevier, vol. 223(2), pages 518-528.
    7. Mark Trede & Cornelia Savu, 2013. "Do stock returns have an Archimedean copula?," Journal of Applied Statistics, Taylor & Francis Journals, vol. 40(8), pages 1764-1778, August.
    8. Yanqin Fan & Xiaohong Chen & Andrew Patton, 2004. "(IAM Series No 003) Simple Tests for Models of Dependence Between Multiple Financial Time Series, with Applications to U.S. Equity Returns and Exchange Rates," FMG Discussion Papers dp483, Financial Markets Group.
    9. Long, Xiangdong & Su, Liangjun & Ullah, Aman, 2011. "Estimation and Forecasting of Dynamic Conditional Covariance: A Semiparametric Multivariate Model," Journal of Business & Economic Statistics, American Statistical Association, vol. 29(1), pages 109-125.
    10. Kole, H.J.W.G. & Koedijk, C.G. & Verbeek, M.J.C.M., 2003. "Stress Testing with Student's t Dependence," ERIM Report Series Research in Management ERS-2003-056-F&A, Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus University Rotterdam.
    11. Andrew J. Patton, 2006. "Estimation of multivariate models for time series of possibly different lengths," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 21(2), pages 147-173, March.
    12. Sim, Nicholas, 2016. "Modeling the dependence structures of financial assets through the Copula Quantile-on-Quantile approach," International Review of Financial Analysis, Elsevier, vol. 48(C), pages 31-45.
    13. Chen, Xiaohong & Fan, Yanqin & Patton, Andrew J., 2004. "Simple tests for models of dependence between multiple financial time series, with applications to U.S. equity returns and exchange rates," LSE Research Online Documents on Economics 24681, London School of Economics and Political Science, LSE Library.
    14. repec:wrk:wrkemf:02 is not listed on IDEAS
    15. Matthias Fischer & Christian Köck, 2007. "Multivariate Copula Models at Work: Dependence Structure of Energie Prices," Energy and Environmental Modeling 2007 24000014, EcoMod.
    16. Fantazzini, Dean, 2011. "Analysis of multidimensional probability distributions with copula functions. III," Applied Econometrics, Russian Presidential Academy of National Economy and Public Administration (RANEPA), vol. 24(4), pages 100-130.
    17. Fabrizio Cipollini & Robert F. Engle & Giampiero M. Gallo, 2016. "Copula--based Specification of vector MEMs," Papers 1604.01338, arXiv.org.
    18. Y. Malevergne & D. Sornette, 2003. "VaR-Efficient Portfolios for a Class of Super- and Sub-Exponentially Decaying Assets Return Distributions," Papers physics/0301009, arXiv.org.
    19. Cooper, Joseph & Delbecq, Benoît, 2014. "A multi-region approach to assessing fiscal and farm level consequences of government support for farm risk management," Bio-based and Applied Economics Journal, Italian Association of Agricultural and Applied Economics (AIEAA), vol. 3(3), pages 1-23, December.
    20. Dionisio, Andreia & Menezes, Rui & Mendes, Diana & Vidigal Da Silva, Jacinto, 2007. "Nonlinear Dynamics Within Macroeconomic Factors And Stock Market In Portugal, 1993-2003," Applied Econometrics and International Development, Euro-American Association of Economic Development, vol. 7(2), pages 57-70.
    21. Scaillet, Olivier, 2007. "Kernel-based goodness-of-fit tests for copulas with fixed smoothing parameters," Journal of Multivariate Analysis, Elsevier, vol. 98(3), pages 533-543, March.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:phsmap:v:355:y:2005:i:1:p:176-182. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.journals.elsevier.com/physica-a-statistical-mechpplications/ .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.