Transformed Pair Copula Construction of Pareto Copula and Applications

Year 2023, Volume: 36 Issue: 2, 933 - 952, 01.06.2023

Friday Agu , Salih Çelebioğlu

https://doi.org/10.35378/gujs.967577

Abstract

The study introduced the transformed copula models and a D-vine structure for three variables. The numerical applications of the models are evaluated using two different sets of real-life data that exhibit nearly no dependence, highly dependent, over, and under dispersed characteristics. We examined only the volatilities of the first data using the exponentiated weighted moving average (EWMA). The parameter estimates of the models were obtained based on the maximum likelihood estimation method for the bivariate copula models and the Dissmann algorithm for sequential top-down estimation for the D-vine structure. The results showed that the introduced copula models outperformed some existing copula models in terms of their fit statistics for both real-life and simulated data sets. In addition, the Gaussian copula model gave a better fit to the D-vine structure than some existing copula models and could be recommended for modeling a D-vine structure comprising of variables that are positively weak correlated and highly correlated.

Keywords

Copula function, Pair copula, Regular vine, Transformed copula, Kendall's tau

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