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Revisiting the Copula-Based Trading Method Using the Laplace Marginal Distribution Function

Author

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  • Tayyebeh Nadaf

    (Department of Mathematics, Hamedan Branch, Islamic Azad University, Hamedan 1584743311, Iran)

  • Taher Lotfi

    (Department of Mathematics, Hamedan Branch, Islamic Azad University, Hamedan 1584743311, Iran)

  • Stanford Shateyi

    (Department of Mathematics and Applied Mathematics, School of Mathematical and Natural Sciences, University of Venda, P. Bag X5050, Thohoyandou 0950, South Africa)

Abstract

Pairs trading under the copula approach is revisited in this paper. It is well known that financial returns arising from indices in markets may not follow the features of normal distribution and may exhibit asymmetry or fatter tails, in particular. Due to this, the Laplace distribution is employed in this work to fit the marginal distribution function, which will then be employed in a copula function. In fact, a multivariate copula function is constructed on two indices (based on the Laplace marginal distribution), enabling us to obtain the associated probabilities required for the process of pairs trade and creating an efficient tool for trading.

Suggested Citation

  • Tayyebeh Nadaf & Taher Lotfi & Stanford Shateyi, 2022. "Revisiting the Copula-Based Trading Method Using the Laplace Marginal Distribution Function," Mathematics, MDPI, vol. 10(5), pages 1-9, March.
    • Handle: RePEc:gam:jmathe:v:10:y:2022:i:5:p:783-:d:761542
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    References listed on IDEAS

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    1. James W. Taylor, 2019. "Forecasting Value at Risk and Expected Shortfall Using a Semiparametric Approach Based on the Asymmetric Laplace Distribution," Journal of Business & Economic Statistics, Taylor & Francis Journals, vol. 37(1), pages 121-133, January.
    2. Paravee Maneejuk & Woraphon Yamaka, 2021. "The Role of Economic Contagion in the Inward Investment of Emerging Economies: The Dynamic Conditional Copula Approach," Mathematics, MDPI, vol. 9(20), pages 1-23, October.
    3. Nicholas L. Georgakopoulos, 2018. "Illustrating Finance Policy with Mathematica," Quantitative Perspectives on Behavioral Economics and Finance, Palgrave Macmillan, number 978-3-319-95372-4, February.
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    Cited by:

    1. Jiting Tang & Fuyu Hu & Yimeng Liu & Weiping Wang & Saini Yang, 2022. "High-Resolution Hazard Assessment for Tropical Cyclone-Induced Wind and Precipitation: An Analytical Framework and Application," Sustainability, MDPI, vol. 14(21), pages 1-18, October.
    2. He, Fuli & Yarahmadi, Ali & Soleymani, Fazlollah, 2024. "Investigation of multivariate pairs trading under copula approach with mixture distribution," Applied Mathematics and Computation, Elsevier, vol. 472(C).

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