Pair-copulas modeling in finance |
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Authors: | Beatriz Vaz de Melo Mendes Mariângela Mendes Semeraro Ricardo P Câmara Leal |
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Institution: | 1.IM/COPPEAD,Federal University at Rio de Janeiro,Rio de Janeiro,Brazil;2.COPPEAD,Federal University at Rio de Janeiro,Rio de Janeiro,Brazil |
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Abstract: | This paper concerns itself with applications of pair-copulas in finance, and bridges the gap between theory and application.
We provide a broad view of the problem of modeling multivariate financial log-returns using pair-copulas, gathering together
for this purpose theoretical and computational results from the literature on canonical vines. From the practitioner’s viewpoint,
the paper shows the advantages of modeling through pair-copulas and makes clear that it is possible to implement this methodology
on a daily basis. All the necessary steps (model selection, estimation, validation, simulations, and applications) are discussed
at a level easily understood by all data analysts. |
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