Regime switches in the dependence structure of multidimensional financial data

Misperceptions about extreme dependencies between different financial assets have been an important element of the recent financial crisis, which is why regulating entities do now require financial institutions to account for different behavior under market stress. Such sudden switches in dependence...

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Bibliographic Details
Published inComputational statistics & data analysis Vol. 76; pp. 672 - 686
Main Authors Stöber, Jakob, Czado, Claudia
Format Journal Article
LanguageEnglish
Published Elsevier B.V 01.08.2014
Subjects
[formula omitted]-vine
algorithms
Asymmetry
Bayesian theory
Computer simulation
Copula
Data processing
economic crises
financial assets
financial institutions
Financial returns
Inhomogeneity
Markets
Markov switching
statistical analysis
Statistics
Switches
Switching
Financial returns
Copula
R-vine
Markov switching
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ISSN0167-9473
1872-7352
DOI10.1016/j.csda.2013.04.002

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Summary:Misperceptions about extreme dependencies between different financial assets have been an important element of the recent financial crisis, which is why regulating entities do now require financial institutions to account for different behavior under market stress. Such sudden switches in dependence structures are studied using Markov switching regular vine copulas. These copulas allow for asymmetric dependencies and tail dependencies in high dimensional data. Methods for fast maximum likelihood as well as Bayesian inference are developed. The algorithms are validated in simulations and applied to financial data. The results show that regime switches are present in the dependence structure and that regime switching models provide tools for the accurate description of inhomogeneity during times of crisis.
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ISSN:0167-9473
1872-7352
DOI:10.1016/j.csda.2013.04.002