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The checkerboard copula and dependence concepts

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  • Liyuan Lin
  • Ruodu Wang
  • Ruixun Zhang
  • Chaoyi Zhao

Abstract

We study the problem of choosing the copula when the marginal distributions of a random vector are not all continuous. Inspired by four motivating examples including simulation from copulas, stress scenarios, co-risk measures, and dependence measures, we propose to use the checkerboard copula, that is, intuitively, the unique copula with a distribution that is as uniform as possible within regions of flexibility. We show that the checkerboard copula has the largest Shannon entropy, which means that it carries the least information among all possible copulas for a given random vector. Furthermore, the checkerboard copula preserves the dependence information of the original random vector, leading to two applications in the context of diversification penalty and impact portfolios. The numerical and empirical results illustrate the benefits of using the checkerboard copula in the calculation of co-risk measures.

Suggested Citation

  • Liyuan Lin & Ruodu Wang & Ruixun Zhang & Chaoyi Zhao, 2024. "The checkerboard copula and dependence concepts," Papers 2404.15023, arXiv.org, revised Oct 2024.
    • Handle: RePEc:arx:papers:2404.15023
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    References listed on IDEAS

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    5. Genest, Christian & Nešlehová, Johanna, 2007. "A Primer on Copulas for Count Data," ASTIN Bulletin, Cambridge University Press, vol. 37(2), pages 475-515, November.
    6. Block, Henry W. & Savits, Thomas H. & Shaked, Moshe, 1985. "A concept of negative dependence using stochastic ordering," Statistics & Probability Letters, Elsevier, vol. 3(2), pages 81-86, April.
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