Pair-Copulas Modeling in Finance

Financial Markets and Portfolio Management, Vol. 24, No. 2, pp. 193-213, 2010

Posted: 18 Jun 2010

See all articles by Beatriz V.M. Mendes

Beatriz V.M. Mendes

Instituto Nacional de Matemática Pura e Aplicada (IMPA)

Mariângela Mendes Semeraro

Universidade Federal do Rio de Janeiro (UFRJ)

Ricardo P. C. Leal

The COPPEAD Graduate School of Business

Date Written: April 15, 2010

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.

Keywords: Pair-Copulas, Multivariate Modeling, Markowitz Mean Variance Model

JEL Classification: C16, C51, G11

Suggested Citation

Mendes, Beatriz V.M. and Mendes Semeraro, Mariângela and Leal, Ricardo Pereira Câmara, Pair-Copulas Modeling in Finance (April 15, 2010). Financial Markets and Portfolio Management, Vol. 24, No. 2, pp. 193-213, 2010 , Available at SSRN: https://ssrn.com/abstract=1626712

Beatriz V.M. Mendes (Contact Author)

Instituto Nacional de Matemática Pura e Aplicada (IMPA) ( email )

Estrada Dona Castorina 110
Rio de Janeiro, 22460
Brazil

Mariângela Mendes Semeraro

Universidade Federal do Rio de Janeiro (UFRJ) ( email )

Ricardo Pereira Câmara Leal

The COPPEAD Graduate School of Business ( email )

Rua Pascoal Lemme
355 - Cidade Universitária
Rio de Janeiro, Rio de Janeiro 21941-918
Brazil
39389871 (Phone)

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