Structure and Estimation of Lévy Subordinated Hierarchical Archimedean Copulas (LSHAC): Theory and Empirical Tests

45 Pages Posted: 27 Sep 2015 Last revised: 16 Jul 2020

See all articles by Wenjun Zhu

Wenjun Zhu

Nanyang Business School, Nanyang Technological University

Chou‐Wen Wang

National Kaohsiung University of Science and Technology

Ken Seng Tan

University of Waterloo

Date Written: June 23, 2015

Abstract

Lévy subordinated hierarchical Archimedean copulas (LSHAC) are flexible models in high dimensional modeling. However, there is limited literature discussing their applications, largely due to the challenges in estimating their structures and their parameters. In this paper, we propose a three-stage estimation procedure to determine the hierarchical structure and the parameters of a LSHAC. This is the first paper to empirically examine the modeling performances of the LSHAC models using ex- change traded funds. Simulation study demonstrates the reliability and robustness of the proposed estimation method in determining the optimal structure. Empirical analysis further shows that, compared to elliptical copulas, LSHACs have better fitting abilities as well as more accurate out-of-sample Value-at-Risk estimates with less parameters. In addition, from a financial risk management point of view, the LSHACs have the advantage of being very flexible in modeling the asymmetric tail dependence, providing more conservative estimations of the probabilities of extreme downward co-movements in the financial market.

Keywords: High dimensional modeling, Hierarchical Archimedean copulas, Lévy subordinators, Downside risk

JEL Classification: C13, C16, G15, G17

Suggested Citation

Zhu, Wenjun and Wang, Chou‐Wen and Tan, Ken Seng, Structure and Estimation of Lévy Subordinated Hierarchical Archimedean Copulas (LSHAC): Theory and Empirical Tests (June 23, 2015). Journal of Banking and Finance, 69 (2016): 20-36., Available at SSRN: https://ssrn.com/abstract=2663989 or http://dx.doi.org/10.2139/ssrn.2663989

Wenjun Zhu

Nanyang Business School, Nanyang Technological University ( email )

50 Nanyang Avenue
Singapore, 639798
Singapore
(65) 6592-1859 (Phone)

HOME PAGE: http://sites.google.com/view/wenjun-zhu

Chou‐Wen Wang (Contact Author)

National Kaohsiung University of Science and Technology ( email )

2 Jhuoyue Rd.
Nanzih
Kaohsiung City, Taiwan 811
Taiwan

Ken Seng Tan

University of Waterloo ( email )

Waterloo, Ontario N2L 3G1
Canada

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

Paper statistics

Downloads
118
Abstract Views
797
rank
291,454
PlumX Metrics