Generalized Additive Models for Pair-Copula Constructions
34 Pages Posted: 4 Aug 2016
Date Written: August 4, 2016
Abstract
Pair-copula constructions are flexible models for the dependence in a random vector that have attracted a lot of interest in recent years. In this paper, we use generalized additive models to extend pair-copula constructions to allow for effects of covariates on the dependence parameters. We let each pair-copula parameter depend directly on the covariates in a parametric, semi-parametric or non-parametric way. We propose a sequential estimation method that we study by simulation, and apply our method to investigate the time-varying dependence structure between the intraday returns on four major foreign exchange rates.
Keywords: conditional copula, covariates, dependence modeling, partially linear models, semiparametric, smoothing and nonparametric regression
JEL Classification: C13, C14, C51, C52, C53
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