Is a Normal Copula the Right Copula?

86 Pages Posted: 8 Sep 2015

See all articles by Dante Amengual

Dante Amengual

Centre for Monetary and Financial Studies (CEMFI)

Enrique Sentana

Centro de Estudios Monetarios y Financieros (CEMFI); Financial Markets Group; Centre for Economic Policy Research (CEPR)

Date Written: September 2015

Abstract

We derive computationally simple and intuitive expressions for score tests of Gaussian copulas against Generalised Hyperbolic alternatives, including symmetric and asymmetric Student t, and Hermite polynomial expansions. We decompose our tests into third and fourth moment components, and obtain one-sided Likelihood Ratio analogues, whose asymptotic distribution we provide. We conduct Monte Carlo exercises to assess the finite sample properties of asymptotic and bootstrap versions of our tests. In an empirical application to CRSP stocks, we find that short-term reversals and momentum effects are better captured by non-Gaussian copulas. We estimate their parameters by indirect inference, and devise successful trading strategies.

Keywords: Cokurtosis, Coskewness, indirect inference, Kuhn-Tucker test, momentum strategies, non-linear dependence, short-term reversals, Supremum test, underidentified parameters

JEL Classification: C12, C46, C52, G11, G14

Suggested Citation

Amengual, Dante and Sentana, Enrique, Is a Normal Copula the Right Copula? (September 2015). CEPR Discussion Paper No. DP10809. Available at SSRN: https://ssrn.com/abstract=2657165

Dante Amengual (Contact Author)

Centre for Monetary and Financial Studies (CEMFI) ( email )

Casado del Alisal 5
28014 Madrid
Spain

Enrique Sentana

Centro de Estudios Monetarios y Financieros (CEMFI) ( email )

Casado del Alisal 5
28014 Madrid
Spain
+34 91 429 0551 (Phone)
+34 91 429 1056 (Fax)

HOME PAGE: http://www.cemfi.es/~sentana/

Financial Markets Group

Houghton Street
London School of Economics & Political Science (LSE)
London WC2A 2AE
United Kingdom
+44 20 7955 7002 (Phone)
+44 20 7852 3580 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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