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Out-of-sample comparison of copula specifications in multivariate density forecasts

Author

Listed:
  • Cees Diks

    (Faculty of Economics and Business - UvA - University of Amsterdam [Amsterdam] = Universiteit van Amsterdam)

  • Valentyn Panchenko

    (Faculty of Business - UNSW - University of New South Wales [Sydney])

  • Dick van Dijk

    (Erasmus University Rotterdam)

Abstract

We introduce a statistical test for comparing the predictive accuracy of competing copula specifications in multivariate density forecasts, based on the Kullback-Leibler Information Criterion (KLIC). The test is valid under general conditions on the competing copulas: in particular it allows for parameter estimation uncertainty and for the copulas to be nested or non-nested. Monte Carlo simulations demonstrate that the proposed test has satisfactory size and power properties in finite samples. Applying the test to daily exchange rate returns of several major currencies against the US dollar we find that the Student- copula is favored over Gaussian, Gumbel and Clayton copulas.

Suggested Citation

  • Cees Diks & Valentyn Panchenko & Dick van Dijk, 2010. "Out-of-sample comparison of copula specifications in multivariate density forecasts," Post-Print hal-00732675, HAL.
    • Handle: RePEc:hal:journl:hal-00732675
    DOI: 10.1016/j.jedc.2010.06.021
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    More about this item

    Keywords

    C12; C14; C32; C52; C53; Copula-based density forecast; Empirical copula; Kullback-Leibler Information Criterion; Out-of-sample forecast evaluation; Semi-parametric statistics;
    All these keywords.

    JEL classification:

    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
    • C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
    • 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
    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods

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