Modeling international financial returnswith a multivariate regime switching copula

In order to capture observed asymmetric dependence in international financial returns, we construct amultivariate regime-switching model of copulas. We model dependence with one Gaussian and onecanonical vine copula regime. Canonical vines are constructed from bivariate conditional copulas andprovide a very flexible way of characterizing dependence in multivariate settings. We apply themodel to returns from the G5 and Latin American regions, and document two main findings. First, wediscover that models with canonical vines generally dominate alternative dependence structures.Second, the choice of copula is important for risk management, because it modifies the Value at Risk(VaR) of international portfolio returns.....