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Estimating Pair-Copula Constructions Using Empirical Tail Dependence Functions: an Application to Russian Stock Market

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  • Travkin, A.

    (National Research University Higher School of Economics, Moscow, Russia)

Abstract

Tail dependence plays important role in portfolio optimization. The higher tail dependence among assets, the higher risk of simultaneous high loss in their prices. In this paper the choice of pair-copulas in pair-copula construction model is done by minimizing the distances between theoretical and empirical tail dependence functions. This method is believed to provide better approximation of tails of joint distribution (compared to maximal spanning tree methods), yet hold all advantages of pair-copula constructions as models of multivariate dependence.

Suggested Citation

  • Travkin, A., 2015. "Estimating Pair-Copula Constructions Using Empirical Tail Dependence Functions: an Application to Russian Stock Market," Journal of the New Economic Association, New Economic Association, vol. 25(1), pages 39-55.
    • Handle: RePEc:nea:journl:y:2015:i:25:p:39-55
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    References listed on IDEAS

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    6. 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.
    7. Dißmann, J. & Brechmann, E.C. & Czado, C. & Kurowicka, D., 2013. "Selecting and estimating regular vine copulae and application to financial returns," Computational Statistics & Data Analysis, Elsevier, vol. 59(C), pages 52-69.
    8. Penikas, H., 2010. "Financial Applications of Copula-Models," Journal of the New Economic Association, New Economic Association, issue 7, pages 24-44.
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    Cited by:

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    More about this item

    Keywords

    pair-copula constructions; regular vines; EGARCH; tail dependence functions; portfolio optimization;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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