Nested Archimedean Copulas Meet R: The nacopula Package

The package nacopula provides procedures for constructing nested Archimedean copulas in any dimensions and with any kind of nesting structure, generating vectors of random variates from the constructed objects, computing function values and probabilities of falling into hypercubes, as well as evaluation of characteristics such as Kendall's tau and the tail-dependence coefficients. As by-products, algorithms for various distributions, including exponentially tilted stable and Sibuya distributions, are implemented. Detailed examples are given.

Estimation and Model Selection of Copulas with an Application to Exchange Rates

Copulas are the part of a multivariate distribution function that fully captures the cross sectional dependence between the variables of interest and they have become a very popular tool to model dependencies different from the linear correlation of elliptical distributions. We review the theory of copula functions, present a number of examples and describe how to sample random data from these. Different techniques for estimation and model selection are discussed and compared in an extensive Monte Carlo study. We find that a test not considered in the literature, namely the Jarque-Bera test applied on transformed data from the conditional copula, has the best properties of the presented tests, but that the most reliable criterion for selecting the best fitting copula is the Akaike information criterion. We model exchange rate returns of Latin American currencies against the euro with copulas and we find evidence of symmetric dependence, excess upper tail dependence and excess lower tail dependence.econometrics;

Assessing Dependence Changes in the Asian Financial Market Returns Using Plots Based on Nonparametric Measures

This paper investigates whether or not there are significant changes in the dependence between the Thai equity market and six Asian markets - namely, Singaporean, Malaysian, Hong Kong, Korean, Indonesian and Taiwanese markets - due to 1997-July financial crisis. If so, this may be an indication that the underlying bivariate joint distributions capturing the dependence between the Thai market and these six markets have changed. We employ the chi-plot proposed by Fisher and Switzer (2001) and the Kendall plot proposed by Genest and Boies (2003) to examine the dependence in these six markets for the pre- and post-1997 financial crisis periods. We find that marginal distributions of all seven markets have notably changed due to this financial crisis, and that the functional forms of the underlying joint distributions generating the dependence in the Korean, Indonesian and Taiwan markets have also changed for the post-crisis period. It appears that the same parametric copula can capture the dependence in the Singapore, Malaysia and Hong Kong markets for both pre- and post-crisis periods, and that only the tail indices of bivariate distributions between the Thai and these three markets have changed. It is interesting to observe that the same conclusions can be drawn using both chi- and Kendall plots.chi-plot, copula, dependence, Kendall-plot

New copula models in quantitative finance

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Who’s A Good Decision Maker? Data-Driven Expert Worker Ranking under Unobservable Quality

Evaluation of expert workers by their decision quality has substantial practical value, yet using other expert workers for decision quality evaluation tasks is costly and often infeasible. In this work, we frame the Ranking of Expert workers according to their unobserved decision Quality (REQ) -- without resorting to evaluation by other experts -- as a new Data Science problem. This problem is challenging, as the correct decisions are commonly unobservable and substantial parts of the information available to the decision maker is not available for retrospective decision evaluation. We propose a new machine learning approach to address this problem. We evaluate our method on one dataset representing real expert decisions and two public datasets, and find that our approach is successful in generating highly accurate rankings. Moreover, we observe that our approach’s superiority over the baseline is particularly prominent as evaluation settings become increasingly challenging

Probabilistic methods in the analysis of protein interaction networks

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Flood Frequency Analysis Using Copula with Mixed Marginal Distributions

In flood frequency analysis, a flood event is mainly characterized by peak flow, volume and duration. These three variables or characteristics of flood are random in nature and mutually correlated. In this article, a methodology is developed to derive bivariate joint distributions of the flood characteristics using the concept of copula considering a set of parametric and nonparametric marginal distributions for peak flow, volume and duration to mathematically model the correlated nature among them. A set of parametric distribution functions, and nonparametric methods based on kernel density estimation and orthonormal series are used to determine the marginal distribution functions for peak flow, volume and duration. In conventional method of flood frequency analysis, the marginal distribution functions of peak flow, volume and duration are assumed to follow some specific parametric distribution function. The concept of copula relaxes the restriction of traditional flood frequency analysis by selecting marginals from different families of probability distribution functions for flood characteristics. The present work performs a better selection of marginal distribution functions for flood characteristics by parametric and nonparametric estimation procedures, and demonstrates how the concept of copula may be used for establishing joint distribution function with mixed marginal distributions. The methodology is demonstrated with seventy years streamflow data of Red River at Grand Forks of North Dakota, US. The research work reported here is already submitted by the authors as a manuscript for review to Water Resources Research, AGU.https://ir.lib.uwo.ca/wrrr/1017/thumbnail.jp

A Method of Moments Estimator of Tail Dependence in Elliptical Copula Models

An elliptical copula model is a distribution function whose copula is that of an elliptical distri- bution. The tail dependence function in such a bivariate model has a parametric representation with two parameters: a tail parameter and a correlation parameter. The correlation parameter can be estimated by robust methods based on the whole sample. Using the estimated correla- tion parameter as plug-in estimator, we then estimate the tail parameter applying a modification of the method of moments approach proposed in the paper by J.H.J. Einmahl, A. Krajina and J. Segers [Bernoulli 14(4), 2008, 1003-1026]. We show that such an estimator is consistent and asymptotically normal. Also, we derive the joint limit distribution of the estimators of the two parameters. By a simulation study, we illustrate the small sample behavior of the estimator of the tail parameter and we compare its performance to that of the estimator proposed in the paper by C. KlÄuppelberg, G. Kuhn and L. Peng [Scandinavian Journal of Statistics 35(4), 2008, 701-718].asymptotic normality;elliptical copula;elliptical distribution;meta-elliptical model;method of moments;semi-parametric model;tail dependence