Dynamic copulas for finance

Meer over het boek

The interactions of financial securities are crucial for assessing potential portfolio losses. While the importance of this is recognized, two key questions persist: What drives changes in the dependence structure of financial assets? How can these fluctuating dependencies be measured? Linear correlation coefficients are commonly used to gauge interactions among financial assets but fall short in capturing shifts in dependence structure. Copulas offer a more adaptable measurement of dependence. This work develops Dynamic Copula frameworks by incorporating stochastic parameters into Archimedian and Elliptical Copula functions. Unlike static correlation measures, Dynamic Copulas effectively replicate the unstable interactions found in financial markets. Various Dynamic Copulas are applied to global stock, bond, commodity, and exchange rate data to analyze correlation time paths that elucidate market reactions to economic shocks. The study further investigates the interactions among dependencies, volatility, and returns to assess the effectiveness of portfolio diversification for wealth protection. Portfolio risks are estimated using Dynamic Copulas, showcasing their ability to accurately reflect market interactions. Additionally, the analysis highlights how changing dependence intensities influence potential portfolio losses. Finally, Dynamic Copulas are employed to optimize higher moment portfolios, underscoring the significanc