AN INTRODUCTION TO COPLULAS.pptxVIP

INTRODUCTIONTO COPULASPresented by : Mohsen Ben Hassine2011OutlineDefinitions and Basic PropertiesDependenceImportant copulasMethods of Constructing CopulasChoice of ModelsDefinitions and Basic Properties The Word Copula is a Latin noun that means A link, tie, bond‘ Appeared for the first time (Sklar 1959) Non-linear dependence Be able to measure dependence for heavy tail distributions Definitions and Basic Properties Marginal distribution function Joint distribution function For each pair (x, y), we can associate three numbers: F(x), G(y) and H(x, y)Definitions and Basic Properties An n-dimensional copula is a distribution function on [0, 1]n, with standard uniform marginal distributions. If (X, Y ) is a pair of continuous random variables with distribution function H(x, y) and marginal distributions Fx(x) and FY (y) respectively, then U = FX(x) ~ U(0, 1) and V = FY(y) ~ U(0, 1) and the distribution function of (U, V ) is a copula.Definitions and Basic Properties Properties Example: Independent CopulaDefinitions and Basic PropertiesThe graph of Independent CopulaDefinitions and Basic PropertiesThe Frechet-Hoeffding Bounds for Joint Distribution Fréchet Upper bound Copula ( Countermonotonic) Fréchet Lower bound Copula (Comonotonic)Definitions and Basic Properties Any copula will be bounded by Fréchet lower and upper bound copulas U1=U2U2=1-U1Definitions and Basic Properties Sklars TheoremLet H be a joint df with marginal dfs F and G, Then there exists a copula C such that If F and G are continuous, then the copula is uniqueDependenceLinear correlation The correlation coefficient between a pair of variables (X,Y ), defined as Rank correlation Spearman’s rho : Pearson applied to ranks Kendall’s Tau Tail dependenceDependenceSpearman’s Rho Kendall’s TauImportant copulasGaussian (Normal) copula For ρ=0.3Important copulasStudent’s t-copula For v=2, ρ=0.3 Important copulasArchimedean copulas The family of Archimedean copulas is a useful tool to generate copulas