DP10809 Is a normal copula the right copula?

Author(s): Dante Amengual, 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, underidentified parameters
JEL(s): C12, C46, C52, G11, G14
Programme Areas: Financial Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=10809

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.