Most Entropic Copulas: General Form, and Calibration to High-Dimensional Data in an Important Special Case

13 Pages Posted: 15 Dec 2010

See all articles by Craig A. Friedman

Craig A. Friedman

State++

Jinggang Huang

Standard & Poor's - Quantitative Analytics

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

Suggested Citation

Friedman, Craig A. and Huang, Jinggang, Most Entropic Copulas: General Form, and Calibration to High-Dimensional Data in an Important Special Case (December 14, 2010). Available at SSRN: https://ssrn.com/abstract=1725517 or http://dx.doi.org/10.2139/ssrn.1725517

Craig A. Friedman (Contact Author)

State++ ( email )

New York, NY
United States

Jinggang Huang

Standard & Poor's - Quantitative Analytics ( email )

55 Water Street
New York, NY 10041
United States