Comparing the Accuracy of Copula-Based Multivariate Density Forecasts in Selected Regions of Support

Tinbergen Institute Discussion Paper 13-061/III

40 Pages Posted: 23 Apr 2013

See all articles by Cees G. H. Diks

Cees G. H. Diks

University of Amsterdam - Faculty of Economics and Business (FEB); Tinbergen Institute

V. Panchenko

University of Amsterdam - Center for Nonlinear Dynamics in Economics and Finance

Oleg Sokolinskiy

Board of Governors of the Federal Reserve System

Dick J. C. van Dijk

Erasmus University Rotterdam - Erasmus School of Economics - Econometric Institute; ERIM

Date Written: April 18, 2013

Abstract

This paper develops a testing framework for comparing the predictive accuracy of copula-based multivariate density forecasts, focusing on a specific part of the joint distribution. The test is framed in the context of the Kullback-Leibler Information Criterion, but using (out-of-sample) conditional likelihood and censored likelihood in order to focus the evaluation on the region of interest. Monte Carlo simulations document that the resulting test statistics have satisfactory size and power properties in small samples. In an empirical application to daily exchange rate returns we find evidence that the dependence structure varies with the sign and magnitude of returns, such that different parametric copula models achieve superior forecasting performance in different regions of the support. Our analysis highlights the importance of allowing for lower and upper tail dependence for accurate forecasting of common extreme appreciation and depreciation of different currencies.

Keywords: Copula-based density forecast, Kullback-Leibler Information Criterion, out-of-sample forecast evaluation

JEL Classification: C12, C14, C32, C52, C53

Suggested Citation

Diks, Cees G. H. and Panchenko, V. and Sokolinskiy, Oleg and van Dijk, Dick J.C., Comparing the Accuracy of Copula-Based Multivariate Density Forecasts in Selected Regions of Support (April 18, 2013). Tinbergen Institute Discussion Paper 13-061/III, Available at SSRN: https://ssrn.com/abstract=2254892 or http://dx.doi.org/10.2139/ssrn.2254892

Cees G. H. Diks (Contact Author)

University of Amsterdam - Faculty of Economics and Business (FEB) ( email )

Roetersstraat 11
Amsterdam, 1018 WB
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+31 20 525 53 29 (Phone)
+31 20 525 4349 (Fax)

Tinbergen Institute ( email )

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V. Panchenko

University of Amsterdam - Center for Nonlinear Dynamics in Economics and Finance ( email )

Spui 21
Amsterdam, 1018 WB
Netherlands
+31 20 5257356 (Phone)

HOME PAGE: http://home.uva.nl/v.panchenko

Oleg Sokolinskiy

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Dick J.C. Van Dijk

Erasmus University Rotterdam - Erasmus School of Economics - Econometric Institute

P.O. Box 1738
3000 DR Rotterdam
Netherlands

ERIM ( email )

P.O. Box 1738
3000 DR Rotterdam
Netherlands
+31 10 408 1263 (Phone)
+31 10 4089162 (Fax)

HOME PAGE: http://people.few.eur.nl/djvandijk

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