Dynamic structured copula models

Abstract

Abstract There is an increasing demand for models of multivariate time-series with time-varying and non-Gaussian dependencies. The available models suffer from the curse of dimensionality or from restrictive assumptions on the parameters and distributions. A promising class of models is that of hierarchical Archimedean copulae (HAC), which allows for non-exchangeable and non-Gaussian dependency structures with a small number of parameters. In this paper we develop a novel adaptive estimation technique of the parameters and of the structure of HAC for time-series. The approach relies on a local change-point detection procedure and a locally constant HAC approximation. Typical applications are in the financial area but also recently in the spatial analysis of weather parameters. We analyse the time varying dependency structure of stock indices and exchange rates. Both examples reveal periods with constant and turmoil dependencies. The economic significance of the suggested modelling is evaluated using the Value-at-Risk of a portfolio.