A New Copula for Modeling Tail Dependence
29 Pages Posted: 26 Aug 2010 Last revised: 15 Nov 2010
Date Written: September 22, 2010
We introduce a new copula which simultaneously allows fully-general correlation structures in the bulk of a multivariate distribution and an arbitrarily high degree of dependence in the left tails. This is ideally suited for modeling financial assets which may display moderate correlation in normal times, but which experience simultaneous left tail events, such as during a financial crisis. Our new copula is shown to be fully flexible in the sense that the user can specify a desired structure for a sequence of increasingly dire events in the left tail, while still retaining the same correlation structure in the bulk. We illustrate the use of this copula with an application to hedge fund returns.
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