Vine copula-based asymmetry and tail dependence modeling

Jia Xu*, Longbing Cao*

*Corresponding author for this work

Research output: Chapter in Book/Report/Conference proceedingConference proceeding contributionpeer-review

5 Citations (Scopus)

Abstract

Financial variables such as asset returns in the massive market contain various hierarchical and horizontal relationships that form complicated dependence structures. Modeling these structures is challenging due to the stylized facts of market data. Many research works in recent decades showed that copula is an effective method to describe relations among variables. Vine structures were introduced to represent the decomposition of multivariate copula functions. However, the model construction of vine structures is still a tough problem owing to the geometrical data, conditional independent assumptions and the stylized facts. In this paper, we introduce a new bottom-to-up method to construct regular vine structures and applies the model to 12 currencies over 16 years as a case study to analyze the asymmetric and fat tail features. The out-of-sample performance of our model is evaluated by Value at Risk, a widely used industrial benchmark. The experimental results show that our model and its intrinsic design significantly outperform industry baselines, and provide financially interpretable knowledge and profound insights into the dependence structures of multi-variables with complex dependencies and characteristics.

Original languageEnglish
Title of host publicationAdvances in Knowledge Discovery and Data Mining
Subtitle of host publication22nd Pacific-Asia Conference, PAKDD 2018, Melbourne, VIC, Australia, June 3-6, 2018, Proceedings, Part I
EditorsDinh Phung, Vincent S. Tseng, Geoffrey I. Webb, Bao Ho, Mohadeseh Ganji, Lida Rashidi
Place of PublicationCham
PublisherSpringer, Springer Nature
Pages285-297
Number of pages13
ISBN (Electronic)9783319930343
ISBN (Print)9783319930336
DOIs
Publication statusPublished - 2018
Externally publishedYes
Event22nd Pacific-Asia Conference on Advances in Knowledge Discovery and Data Mining, PAKDD 2018 - Melbourne, Australia
Duration: 3 Jun 20186 Jun 2018

Publication series

NameLecture Notes in Computer Science
Volume10937
ISSN (Print)0302-9743
ISSN (Electronic)1611-3349

Conference

Conference22nd Pacific-Asia Conference on Advances in Knowledge Discovery and Data Mining, PAKDD 2018
Country/TerritoryAustralia
CityMelbourne
Period3/06/186/06/18

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