R
RobWat
Member
Hi, I have a couple of questions on copulas...
1) It seems that we often have to discuss whether the Clayton, Gumbel or Frank copulas are appropriate based on the likely presence or not of upper/lower tail dependence. The Clayton has lower tail dependence and the Gumbel has upper tail dependence, while the Frank has neither. If you're considering a joint distribution that it likely to exhibit either upper or lower tail dependence, but not both, couldn't you use either the Clayton or Gumbel copulas by simply switching the definition of the upper tail in your distributions?
For example, say you're considering the joint behaviour in the tails of the return on two stocks that you think might exhibit lower tail dependence, but not upper tail dependence. Couldn't you use the Gumbel copula (with upper tail dependence) and simply define X (your random variable) to be the return multiplied by -1?
2) Do we need to know how to generate random variables from a multivariate distribution other than the multivariate normal distribution? For a multivariate normal distribution you can use Cholesky decomposition or principal component analysis. I can see how this could be extended to the case where you have a Gaussian copula, with non-normal marginals. I can also see how you would extend it to multivariate normal mixture distributions (which is discussed briefly in the notes). But what if, say you're using an Archimedean copula? How would that work? Could we be expected to know how it works in the exam?
Thanks.
1) It seems that we often have to discuss whether the Clayton, Gumbel or Frank copulas are appropriate based on the likely presence or not of upper/lower tail dependence. The Clayton has lower tail dependence and the Gumbel has upper tail dependence, while the Frank has neither. If you're considering a joint distribution that it likely to exhibit either upper or lower tail dependence, but not both, couldn't you use either the Clayton or Gumbel copulas by simply switching the definition of the upper tail in your distributions?
For example, say you're considering the joint behaviour in the tails of the return on two stocks that you think might exhibit lower tail dependence, but not upper tail dependence. Couldn't you use the Gumbel copula (with upper tail dependence) and simply define X (your random variable) to be the return multiplied by -1?
2) Do we need to know how to generate random variables from a multivariate distribution other than the multivariate normal distribution? For a multivariate normal distribution you can use Cholesky decomposition or principal component analysis. I can see how this could be extended to the case where you have a Gaussian copula, with non-normal marginals. I can also see how you would extend it to multivariate normal mixture distributions (which is discussed briefly in the notes). But what if, say you're using an Archimedean copula? How would that work? Could we be expected to know how it works in the exam?
Thanks.