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Modeling International Financial Returns with a Multivariate Regime Switching Copula

Author

Listed:
  • Chollete, Lorán

    (Dept. of Finance and Management Science, Norwegian School of Economics and Business Administration)

  • Heinen, Andréas

    (Dept. of Statistics and Econometrics, Universidad Carlos III de Madrid)

  • Valdesogo, Alfonso

    (Center for Operations Research and Econometrics (CORE), Université Catholique de Louvain)

Abstract
In order to capture observed asymmetric dependence in international financial returns, we construct a multivariate regime-switching model of copulas. We model dependence with one Gaussian and one canonical vine copula regime. Canonical vines are constructed from bivariate conditional copulas and provide a very flexible way of characterizing dependence in multivariate settings. We apply the model to returns from the G5 and Latin American regions, and document two main findings. First, we discover that models with canonical vines generally dominate alternative dependence structures. Second, the choice of copula is important for risk management, because it modifies the Value at Risk (VaR) of international portfolio returns.

Suggested Citation

  • Chollete, Lorán & Heinen, Andréas & Valdesogo, Alfonso, 2008. "Modeling International Financial Returns with a Multivariate Regime Switching Copula," Discussion Papers 2008/3, Norwegian School of Economics, Department of Business and Management Science.
    • Handle: RePEc:hhs:nhhfms:2008_003
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    File URL: http://hdl.handle.net/11250/163946
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Asymmetric dependence; Canonical vine copula; International returns; Regime-Switching; Risk Management; Value-at-Risk;
    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
    • C35 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Discrete Regression and Qualitative Choice Models; Discrete Regressors; Proportions
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)

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