Mixture Pair-Copula-Constructions

44 Pages Posted: 21 Jan 2015

See all articles by Gregor N. F. Weiss

Gregor N. F. Weiss

University of Leipzig - Faculty of Economics and Management Science

Marcus Scheffer

University of Dortmund - Economics and Social Sciences

Date Written: January 19, 2015

Abstract

We propose the use of convex combinations of parametric copulas as pair-copulas in high-dimensional vine copula models. By doing so, we circumvent the error-prone need to choose and estimate a parametric copula for each paircopula in a vine model. We show in simulations that our proposed model fits the dependence structure in a given data sample significantly better than a competing benchmark. In our empirical study on the models’ accuracy for forecasting the Value-at-Risk of financial portfolios, we show that our proposed mixture pair-copula construction yields significantly better results in backtesting while the benchmark overestimates portfolio risk.

Keywords: Dependence structures; Vine Copulas; Mixture Copulas; Model Selection

JEL Classification: C52; C53; C58

Suggested Citation

Weiss, Gregor N. F. and Scheffer, Marcus, Mixture Pair-Copula-Constructions (January 19, 2015). Journal of Banking and Finance, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2551895

Gregor N. F. Weiss (Contact Author)

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

Grimmaische Str. 12
Leipzig, 04109
Germany
+49 341 97 33821 (Phone)
+49 341 97 33829 (Fax)

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

Marcus Scheffer

University of Dortmund - Economics and Social Sciences ( email )

United States

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