In this paper we test for structural changes in the conditional dependence of two-dimensional foreign exchange data. We show that by modeling the conditional dependence structure using copulae we can detect changes in the dependence beyond linear correlation like changes in the tail of the joint...

Well-being consists of many dimensions such as income, health and education. A society exhibits greater dependence between its dimensions of well-being when the positions of the individuals in the different dimensions are more aligned or correlated. Differences in dependence may lead to very...

The dependence structure among cell by cell in operational risk matrix is a critical issue in the determination of bank-wide operational risk capital under Advanced Measurement Approach (AMA). Especially, Loss Distribution Approach (LDA), which is one of the main methods in AMA, involves...

Purpose – In this chapter, copula theory is used to model dependence structure between hedge fund returns series. Methodology/approach – Goodness-of-fit tests, based on the Kendall's functions, are applied as selection criteria of the “best” copula. After estimating the parametric copula...

The recent financial crisis has highlighted the need for better valuation models and risk management procedures, better understanding of structured products, and has called into question the actions of many financial institutions. It has become commonplace to blame the inadequacy of credit risk...

This paper is an extract of a more complete and detailed work on a speci c class of credit derivatives, namely Collateralized Debt Obligations made out of Collateralized Debt Obligations, widely known as CDO Squareds (CDO2). This asset class has become quite popular in recent years as it...

In Hull and White (2006) we showed how CDO quotes can be used to imply a probability distribution for the hazard rate over the life of the CDO. This is known as the implied copula model. In this paper we develop a parametric version of the implied copula model and show how it can be used for...

This paper concerns itself with applications of pair-copulas in finance, and bridges the gap between theory and application. We provide a broad view of the problem of modeling multivariate financial log-returns using pair-copulas, gathering together for this purpose theoretical and computational...

Linear correlation is only an adequate means of describing the dependence between two random variables when they are jointly elliptically distributed. When the joint distribution of two or more variables is not elliptical the linear correlation coefficient becomes just one of many possible ways...