Tracking a changing copula

• Published in: Journal of empirical finance Vol. 17; no. 3; pp. 485 - 500
• Main Author: Harvey, Andrew
• Format: Journal Article
• Language: English
• Published: Elsevier B.V 01.06.2010; Elsevier
• Series: Journal of Empirical Finance
• Subjects: Concordance; Concordance Contagion Exponentially weighted moving average Quantiles Signal extraction Tail dependence; Contagion; Distribution; Estimation; Exponentially weighted moving average; Hong Kong; Indicators; Maximum likelihood method; Modelling; Quantiles; Signal extraction; South Korea; Stock exchange; Tail dependence; Time; C22; Contagion; Quantiles; Concordance; C14; F36; Signal extraction; Tail dependence; Exponentially weighted moving average
• ISSN: 0927-5398; 1879-1727
• DOI: 10.1016/j.jempfin.2009.10.004

A copula models the relationships between variables independently of their marginal distributions. When the variables are time series, the copula may change over time. Recursive procedures based on indicator variables are proposed for tracking these changes over time. Estimation of the unknown parameters is by maximum likelihood. When the marginal distributions change, pre-filtering is necessary before constructing the indicator variables on which the recursions are based. This entails estimating time-varying quantiles and a simple method based on time-varying histograms is proposed. The techniques are applied to the Hong Kong and Korean stock market indices. Some interesting and unexpected movements are detected, particularly after the attack on the Hong Kong dollar in 1997.