A New Copula for Modeling Tail Dependence

29 Pages Posted: 26 Aug 2010 Last revised: 15 Nov 2010

See all articles by Jeff Holman

Jeff Holman

Highbridge Capital Management

Gordon Ritter

New York University (NYU) - Courant Institute of Mathematical Sciences; City University of New York (CUNY) - Weissman School of Arts and Sciences; Rutgers, The State University of New Jersey - Financial Statistics & Risk Management; New York University (NYU) - NYU Tandon School of Engineering

Date Written: September 22, 2010

Abstract

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.

Suggested Citation

Holman, Jeff and Ritter, Gordon, A New Copula for Modeling Tail Dependence (September 22, 2010). Available at SSRN: https://ssrn.com/abstract=1665977 or http://dx.doi.org/10.2139/ssrn.1665977

Jeff Holman (Contact Author)

Highbridge Capital Management ( email )

40 West 57th Street
New York, NY 10019
United States

Gordon Ritter

New York University (NYU) - Courant Institute of Mathematical Sciences ( email )

New York University
251 Mercer Street
New York, NY 10012
United States

City University of New York (CUNY) - Weissman School of Arts and Sciences ( email )

One Bernard Baruch Way
New York, NY 10010
United States

Rutgers, The State University of New Jersey - Financial Statistics & Risk Management ( email )

110 Frelinghuysen Road
479 Hill Center, Busch Campus
Piscataway, NJ 08854
United States

New York University (NYU) - NYU Tandon School of Engineering ( email )

6 MetroTech Center
Brooklyn, NY 11201
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
355
Abstract Views
1,548
rank
100,773
PlumX Metrics