Questions tagged [copula]
A copula is a multivariate distribution with uniform marginal distributions. Copulas are mostly used to represent/model the structure of dependence between random variables, separately from the margins.
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What are the pros/cons of using a copula model to price CMS spread options, in particular ones with short expiries?
The expiry of the option may not be relevant to the question, but I would be curious to know if a copula model would provide an accurate price for sub 6 month expiry options.
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Optimal Hedging Ratio using Copula Models
Let $r_{s, t}$ and $r_{f, t}$ be the return rates of the spot and futures of a commodity at time $t$. The hedging ratio based on variance minimization is calculated by finding the minimum of the ...
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Dispersion copula
Linear correlation controls two aspects : that of level (Basket options) and that of dispersion (spread options). Is there a copula that has two separate parameters for each?
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Copula Models for Asset Returns
I'm learning about copulas and their applications in finance. When used to assess the dependence structure between two indices for example, can the copula models be estimated directly on the log-...
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How to compute the combined probability of loss for 2 time series (consisting of historical stock prices)?
May I please ask the community's support with the following problem?
I have 2 time series, with approximately 1000 observations each (same number of observations for both). They represent the daily ...
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Estimation of copula for discrete random variable
I'm interested in the estimation of parameter of copula for discrete random variables.
The problem is described as follow:
I have 30 discrete random variables $X_1,.., X_{30}$, each random variable is ...
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Beginner's resources on copulas and impact of correlation on loan defaults?
I'm hoping this question is not too banal or off-topic for this forum.
Could you please help me understand / point me towards some resources on the impact of correlation on loan defaults?
First ...
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Help me understand copula
I have been spending dozens of hours trying to understand what copula is and how it works, but still I am not able to get my head straight.
I am reading the wiki page https://en.wikipedia.org/wiki/...
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Gaussian copula calibration to option price
I have an "exotic" option that is a function of two interest rates (say 3m Libor at 1y maturity and 2y maturity). I assume both the rates follow sabr model (already calibrated to vanillas), ...
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How to include heteroscedasticity in copula modelling
I have a dataset of 9 variables and I want to fit a t-copula to them in order to construct a multivariate and after that resample from it.
I am using Matlab.
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Gaussian Copulas: My Marginal Distribution Includes Negatives but My Copula is Non-Negative?
Attempting Copula in R for Stock Returns, Bond Returns, and Inflation Rates. This is my first attempt with Copulas but I have looked many places and cannot determine what I'm doing wrong. My Marginal ...
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What was the probability distribution used for Mortgage Backed Securities (MBSs) during the subprime crisis?
The probability distribution used for mortgage backed securities divided them into tranches. If tranch#1 was worth 10 million USD, they got paid in full while the rest got paid partially. Most of them ...
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Price a contingent claim with payoff $(S_T-K)1_{\{S_T>K\}}1_{\{L\leq X_T\leq U\}}$
I'd like to price the following contingent claim using a copula model.
$$V_T = (S_T-K)1_{\{S_T>K\}}1_{\{L\leq X_T\leq U\}}$$
where $S$ and $X$ are two stock price processes which follow a non-flat ...
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Copula analytic formula for $max(S_T^1 - K, 0) 1_{\{L<S_T^2<U\}}$
Consider the payoff function
$$ V_T = max(S_T^1 - K, 0) 1_{\{L<S_T^2<U\}} = (S_T^1 - K)1_{\{S_T^1 > K\}}1_{\{L<S_T^2<U\}}$$
where $S_T^1$ and $S_T^2$ are two GBM distributed stocks with ...
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Hierarchical copula vs. vine copula
Vine copulas are a sequential cascade of bivariate copulas meant to capture the hierarchical structure in the dependence structure of random variables. How does this relate or differ from the concept ...
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Does the $t$-copula or Clayton copula capture the dependence structure of empirical returns better?
Which copula captures the dependence structure of empirical asset returns better? the $t$-copula, which has symmetric tail dependence, or the Clayton copula, which has asymmetric tail dependence, and ...
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Correlation sensitivity in multivariate $t$-copula for portfolio VaR of electricity futures using Kendall's tau-$b$ correlation matrix
My t-copula model captures the daily dollar returns of a portfolio of approximately 400 assets. I am curious if there's a generally accepted way to quantify the sensitivity of portfolio movements with ...
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Does Value-at-Risk have any mathematical equivalence to copulas?
Portfolio Value-at-Risk estimated using the copula approach often just means generating artificial data sampled from a parametric copula('s joint multivariate distribution) as a model fit over the ...
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Modelling dependance between the two uncorrelated variables using copulas
Are copulas good tool to model the dependence between the two uncorrelated variables. I have X and Y datasets with 260 data points each with Pearson's correlation=-0.06 and Kendall rank correlation=0....
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How to implement copula portfolio optimization?
This a reference request for any python notebooks, packages or blogs that teach how to do asset allocation using multivariate copulas. How can copula portfolio optimization actually be implemented in ...
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Why do we not use copula for forward starting options?
Why do we use copulas for spread options but do not use them to correlate random variables across time, such as in the forward starting option?
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Joint Distribution of Correlated Variables with Markov Switching
I am modeling a portfolio of correlated assets whose lack of liquidity can be reasonably described by a Markov-switching model. That is, not only is movement size among assets correlated, but so is ...
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Advantage of copula over estimation based on historical data
It seems to me hard to intuitively understand the concept of copulas and their advantages. For example, why would it be better to estimate value at risk of portfolio by modelling its asset returns ...
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What is the R code for estimating copula parameters of BB1 with dim=2? And what's the code for gof test of BB1?
Kindly assist with R code for BB1 copula. Text books and research articles provide codes for clayton, gumbel, frank, normal and t copulas. However, I can't find code for BB1, the copula family ...
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Patton Copula model code and significance of parameters
I am trying to implement a copula model using the Patton (2006) Matlab code. I am unable to determine the significance of the parameters. Does anyone know how i can generate the standard errors from ...
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Portofolio optimization using ARMA-GARCH-EVT-Copula
I am currently trying to do some portfolio optimization by reproducing the methodology found in Sahamkhadam, Stephan & Östermark (2018) ("Portfolio optimization based on GARCH-EVT-Copula ...
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Simulating from a multivariate clayton copula
I am recently into copulas for finance, I've read several examples of how to generate dependent random variables with most kind of copulas. The problem for me is that all the books describe the case ...
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Problem in copula fitting
I have returns of 2 stocks: stock1 and stock2. And I want to fit pair copula.
I use this libraries
library(VineCopula)
library(copula)
then I select an ...
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Convolution of Dependent Random Variables with Copulas
Lets say I have 2 different observations which are fitted to a parametric distribution.
And lets say that they are dependent and can be modeled by one of the copulas.
I want to calculate “a value” ...
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Practical Use of Copulas and Sample Generation
I'm currently studying Copulas. However, i did not understand something.
The very basic phases of Copula fitting is as follows i assume;
Model each samples distribution with a parametric(or non-...
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Historical quotes / prices of multiasset options
I am working on Lévy copulas, and I would like to try calibrating such techniques on real data. Where can I find quotes for multi-asset options? It could be exchange options or any other type of ...
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Using variance reduction on only some models
I am pricing options with some copula based models using Monte Carlo simulation. I was looking up some easily implementable variance reduction methods and decided on antithetic variates. However, ...
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Verifying two properties of the Clayton Copula
So I'm trying to verify the first two properties of a copula for the Clayton model. The first two properties being:
$C(u_1,…,u_d)$ is non-decreasing in each component, $u_i$
The $i^{th}$ marginal ...
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Copula Correlations
It seems that the sample linear correlation coefficient $\hat{\rho}$ of samples generated by a copula that is parametrized by $\rho$ is unequal to $\rho$. For example, I construct a Normal copula with ...
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Metric for measuring the "spread" of a copula
I am fitting copula to log returns data for my undergraduate thesis, and comparing the quality of the fit with AIC. One interesting thing that I found is that the Clayton copula, which has negative ...
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Gaussian copula: contract price
The hazard rates for A and B are 1% and 2% respectively. A contract pays you $1 if A defaults earlier than B. What is the correlation that minimizes the price of the contract?
I have not studied the ...
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Any video lecture on copula function, a statistics concept for measuring dependence?
I have read the paper 'Coping with copulas' and it is a bit hard for me to read since it has lots of mathematical equations.
So I am looking for any video lecture on this topic, copula function. I ...
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Positive quadrant dependence
Gijbels et. al. Positive quadrant dependence tests for copulas (25 page PDF)
What could potentially be application of this concept in economics and finance? From what I read from a couple of papers, ...
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Verifying that the extreme value copula is indeed a copula
Given the extreme value copula as defined in Schölzel/Friederichs (2008),
how does one verify that $\frac{\partial C(u_1, u_2)}{\partial u_1} \geq 0?$ For the LHS, I have $$\exp\left[\log(u_1u_2)A\...
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Alternatives to Elliptical and Archimedean copulas for modelling dependency structure between stocks
Except from the well-know and well-documented Elliptical (i.e. Gaussian, Student-t) and Archimedean (i.e. Frank, Clayton, Gumbel) copulas used to model the dependency structure between stock returns, ...
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trying to better understand copulas
This topic is dense with notation that makes things a bit confusing. But is this the correct interpretation?
Suppose we have two jointly distributed random variables – $X$ and $Y$ – of arbitrary (but ...
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How can we compute copula functions by using Fast Fourier transformation?
Q1. If a copula is expressed in terms of its moment generating function then how can this copula can be computed by using Fast Fourier Transformation?
Q2. Can we use copula to evaluate spread option ...
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How to sample from a copula in matlab
I have two random variables (say, X and Y). Each of these rv's are defined by their CDFs (CDF_X and CDF_Y). These CDFs were obtained empirically, so they are a "stair" graph.
I also have a copula C ...
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Is non-stationarity an issue during copula estimation?
In this paper (1), on page 14 (section 4), the author presents an empirical experiment on the computation of a copula through the use of kernels. To do so, he uses the following stochastic process (...
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How to estimate a copula for time series
I want to estimate a copula for the innovations of two dependent time series (A and B). I have found no reference with a step by step on how to do this. I have only found summarized papers from which ...
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Bivariate risk neutral distribution through copula
I want to build a bivariate risk-neutral distribution from two liquid assets (A and B) through the use of a copula. As A and B are liquid, I have the marginal distributions from the market. All I have ...
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Suggestions to build a copula to price Quanto options
I am willing to price a quanto option through the use of copulas. I will follow the following procedure:
1) Obtain the marginal distributions of the underlying asset and the exchange rate from ...
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simulating from GARCH model with copula innovations
I have a GARCH model fitted on stock returns as:
...
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Difference between Local Vol and Copula
Let's assume we have ATM European call on a basket of two stocks and price it with:
1) Multivariate Local Vol with constant correlation
2) Gaussian copula
Assuming we use the same correlation ...
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Gaussian vs Student Copula applied to finance
I would like to get your opinion on the following topic:
I am comparing the behaviour of Gaussian and Student-t Copulas.
I employ the follwing procedure:
Simulate N=100,000 samples from a Student ...
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