Citation

Discussion Paper Details

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Title: Is a normal copula the right copula?

Author(s): Dante Amengual and Enrique Sentana

Publication Date: September 2015

Keyword(s): Cokurtosis, Coskewness, indirect inference, Kuhn-Tucker test, momentum strategies, non-linear dependence, short-term reversals, Supremum test and underidentified parameters

Programme Area(s): Financial Economics

Abstract: We derive computationally simple and intuitive expressions for score tests of Gaussian copulas against Generalised Hyperbolic alternatives, including symmetric and asymmetric Student t, and Hermite polynomial expansions. We decompose our tests into third and fourth moment components, and obtain one-sided Likelihood Ratio analogues, whose asymptotic distribution we provide. We conduct Monte Carlo exercises to assess the finite sample properties of asymptotic and bootstrap versions of our tests. In an empirical application to CRSP stocks, we find that short-term reversals and momentum effects are better captured by non-Gaussian copulas. We estimate their parameters by indirect inference, and devise successful trading strategies.

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Bibliographic Reference

Amengual, D and Sentana, E. 2015. 'Is a normal copula the right copula?'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=10809