Copula Parameter Estimation – Numerical Considerations and Implications for Risk Management

Journal of Risk, Vol. 13, No. 1, pp. 17-53, Fall 2010

46 Pages Posted: 26 Jul 2010 Last revised: 22 Sep 2011

See all articles by Gregor N. F. Weiss

Gregor N. F. Weiss

University of Leipzig - Faculty of Economics and Management Science

Date Written: 2010

Abstract

The purpose of this paper is to present a comprehensive simulation study on the finite sample properties of minimum-distance and maximum-likelihood estimators for bivariate and multivariate parametric copulas. For five popular parametric copulas, classical maximum-likelihood is compared to a total of nine different minimum-distance estimators. In particular, I consider CvM-, KS- and L1 variants of the CvM-statistic based on the empirical copula process, Kendall's dependence function and Rosenblatt's probability integral transform. The results presented in this paper show that in most settings canonical maximum-likelihood yields smaller estimation biases at less computational effort than any of the MD-estimators. There exist, however, some cases (especially when the sample size increases) where minimum-distance estimators based on the empirical copula process are superior to the ML-estimator. MD-estimators based on Kendall's transform on the other hand yield only suboptimal results in all configurations of the simulation study. The results of the simulation study are confirmed by empirical examples where the Value-at-Risk as well as the Expected Shortfall of 100 bivariate portfolios are computed. Interestingly, the estimates for these risk measures differed considerably depending on the choice of parameter estimator. This result stresses the need for carefully choosing the parameter estimator in contrast to focusing all attention on choosing the parametric copula model.

Keywords: Dependence structures, Risk management, Copulas, parameter estimation

JEL Classification: G32, G11, C12, C14

Suggested Citation

Weiss, Gregor N. F., Copula Parameter Estimation – Numerical Considerations and Implications for Risk Management (2010). Journal of Risk, Vol. 13, No. 1, pp. 17-53, Fall 2010, Available at SSRN: https://ssrn.com/abstract=1648983

Gregor N. F. Weiss (Contact Author)

University of Leipzig - Faculty of Economics and Management Science ( email )

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Leipzig, 04109
Germany
+49 341 97 33821 (Phone)
+49 341 97 33829 (Fax)

HOME PAGE: http://www.wifa.uni-leipzig.de/nfdl

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