Discussion Papers, Department of Finance and Management Science, Norwegian School of Economics (NHH)
No 2008/3:
Modeling International Financial Returns with a Multivariate Regime Switching Copula
Lorán Chollete ()
, Andréas Heinen ()
and Alfonso Valdesogo ()
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.
Keywords: Asymmetric dependence; Canonical vine copula; International returns; Regime-Switching; Risk Management; Value-at-Risk; (follow links to similar papers)
JEL-Codes: C32; C35; G10; (follow links to similar papers)
43 pages, March 12, 2008
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