Most Entropic Copulas: General Form, and Calibration to High-Dimensional Data in an Important Special Case
13 Pages Posted: 15 Dec 2010
Date Written: December 14, 2010
Abstract
We present some general results pertaining to Most Entropic Copulas (MECs), and describe the connection between MECs and a special type of Markov random field model. We also describe a fundamental, new, MEC, the Spearman Copula, which is, in some sense, the simplest nontrivial MEC, and present an efficient numerical method that can be applied to calibrate high-dimensional homogeneous Spearman Copulas. We benchmark Spearman Copula performance against that of other common copulas, on data from the joint distance-to-default movement of companies in the Dow Jones CDX IG Index, a standard portfolio of 125 investment grade entities in North America.
Keywords: Most Entropic Copula, General Form, Spearman Copula, Homogeneous Spearman Copula, Calibration, Numerical procedure, CDX IG Index
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