Modeling high dimensional time-varying dependence using D-vine SCAR models

Details Modeling high dimensional time-varying dependence using D-vine SCAR models Modeling high dimensional time-varying dependence using D-vine SCAR models

2012-02-09

arxiv.org/abs/1202.2008v1

Statistics

Methodology

Scientific paper

We consider the problem of modeling the dependence among many time series. We build high dimensional time-varying copula models by combining pair-copula constructions (PCC) with stochastic autoregressive copula (SCAR) models to capture dependence that changes over time. We show how the estimation of this highly complex model can be broken down into the estimation of a sequence of bivariate SCAR models, which can be achieved by using the method of simulated maximum likelihood. Further, by restricting the conditional dependence parameter on higher cascades of the PCC to be constant, we can greatly reduce the number of parameters to be estimated without losing much flexibility. We study the performance of our estimation method by a large scale Monte Carlo simulation. An application to a large dataset of stock returns of all constituents of the Dax 30 illustrates the usefulness of the proposed model class.

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