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Goodness-of-fit test for copulas

✍ Scribed by Valentyn Panchenko

Publisher
Elsevier Science
Year
2005
Tongue
English
Weight
195 KB
Volume
355
Category
Article
ISSN
0378-4371

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✦ Synopsis

Copulas are often used in finance to characterize the dependence between assets. However, a choice of the functional form for the copula is an open question in the literature. This paper develops a goodness-of-fit test for copulas based on positive definite bilinear forms. The suggested test avoids the use of plug-in estimators that is the common practice in the literature. The test statistics can be consistently computed on the basis of V-estimators even in the case of large dimensions. The test is applied to a dataset of US large cap stocks to assess the performance of the Gaussian copula for the portfolios of assets of various dimension. The Gaussian copula appears to be inadequate to characterize the dependence between assets.

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