SCOMDY models based on pair-copula constructions with application to exchange rates

Vine pair-copula constructions (PCCs) provide an important milestone for the usage of multivariate copulas to model dependence. At present time PCCs are recognized to be the most flexible class of multivariate copulas. Vine PCCs and semiparametric copula-based dynamic (SCOMDY) models with ARMA-GARCH margins are combined. As building blocks of the PCCs, bivariate t-copulas are used. Exchange rates are considered as an application and their dependence structure is modelled using regular and canonical vines. A non-nested model comparison of the above SCOMDY models is performed using the adapted Voung’s test.