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to Copulas

Speaker: Hua, Lei

February 24, 2009

Department of Statistics

University of British Columbia

Outline

Introduction

Definition

Properties

Archimedean Copulas

Constructing Copulas

Reference

Introduction

Introduction

noun that means ''A link, tie,

bond''

(Cassell's Latin Dictionary)

Introduction

history

first time (Sklar 1959)

1981: The earliest paper relating copulas

to the study of dependence among random

variables (Schweizer and Wolff 1981)

1990's: Copula booster: Joe (1997) and

Nelson (1999).

1990's +: Academic literatures on how to

use copulas in risk management.

Introduction

Why copula

Non-linear dependence

Be able to measure dependence for heavy

tail distributions

Very flexible: parametric, semi-parametric

or non-parametric

Be able to study asymptotic properties of

dependence structures

Computation is faster and stable with the

two-stage estimation

Can be more probabilistic or more

statistical

others...

Introduction

Why copula

Introduction

Marginal distribution functions

F x = P [ X x ] , G y = P [Y y ]

H x , y= P [ X x ,Y y ]

three numbers: F(x), G(y) and H(x, y)

Introduction

G(y)

(1, 1)

(x, y)

H(x, y)

(0, 0)

F(x)

(F(x), G(y)) in the unit square [0, 1]*[0, 1]

Introduction

The mapping, which assigns the value

of the joint distribution function to each

ordered pair of values of marginal

distribution function is indeed a copula.

Introduction

G(y)

(1, 1)

Copulas

(x, y)

(0, 0)

Joint distribution function

F(x)

H(x, y)

Definition

Definition

informal

A 2-dimensional copula is a

distribution function on [0, 1]*[0, 1],

with standard uniform marginal

distributions.

Definition

a generic example

variables with distribution function H(x, y) and

marginal distributions Fx(x) and FY (y)

respectively, then U = FX(x) ~ U(0, 1) and V =

FY(y) ~ U(0, 1) and the distribution function of

(U, V ) is a copula.

1

X

1

Y

1

1

C u ,v=H F X u , F Y v

Definition

formal

C :[0,1 ] [0,1 ]

1. C u ,0=C 0, v=0

2. C u ,1=u

C 1,v =v

Grounded

(u2, v2)

(u1, v1)

3. v , v , u , u [0,1] ; u u , v v

1

2

1

2

2

1

2

1

C u 2 , v 2 C u 1 , v 2 C u 2 , v1 C u1 ,v 1 0

2-Increasing

Properties

Properties

Volume of Rectangle

V H = H u 2, v 2 H u1, v 2 H u 2, v1 H u 1, v1

(u2, v2)

(u1, v1)

Properties

Copula is the C-Volume of rectangle

[0,u]*[0,v]

C u , v =V c [0, u ][0, v ]

Copula assigns a number to each rectangle

in [0,1]*[0,1], which is nonnegative !

Properties

(1, 1)

(u, v)

A

(0, 0)

C u , v =V c [0, u ][0, v ]=V c AV c BV c C V c D

Properties

Example: Independent Copula

C u 1 , u 2 =u1 u 2 , u[ 0,1]

1.0

0.8

0.6

CI

0.4

0.2

0.0

1.0

0.8

0.6

0.4

u1

0.2

0.0

0.2

0.4

0.6

0.8

u2

0.0 1.0

Properties

Frchet Lower bound Copula

Frchet Upper bound Copula

Properties

1.0

1.0

0.8

0.8

0.6

0.6

CL

CU

0.4

0.4

0.2

0.2

0.0

1.0

0.8

0.6

0.4

0.2

0.0

0.2

0.4

0.6

0.8

u2

1.0

0.0

u1

0.0

1.0

0.8

0.6

0.4

0.2

0.0

0.2

0.4

0.6

0.8

u2

1.0

0.0

u1

Properties

Any copula will be bounded by Frchet

lower and upper bound copulas

2

C L u1 , u2 C u1 , u 2 C U u1 , u2 , u[0,1 ]

Properties

1.0

0.8

0.6

CUI

0.4

0.2

0.0

1.0

0.8

0.6

0.4

u1

0.2

0.0

0.2

0.4

0.6

0.8

u2

1.0

0.0

Properties

Sklar's Theorem

Let H be a joint df with marginal dfs F and G,

Then there exists a copula C such that

H u , v =C F u , G v

If F and G are continuous,then the copula is

unique

Properties

Important Consequences

together

A joint df can be decomposed into marginal

dfs and copula

marginal dfs and copula can be studied

separately (eg: MLE separately)

Given a copula, we can get many multivariate

distributions by selecting different marginal dfs

Properties

Other topics

Survival copula

Functional Invariance for monotone transform

Non-parametric measures of dependence

Tail dependence

Simulation

Archimedean Copulas

Archimedean Copulas

C u , v = g

[1]

g u g v

g :[0,1][ 0,]

g 1=0

convex function

[1]

g t , 0t g 0

0,

g 0t

t ={

pseudo-inverse of g

Archimedean Copulas

Archimedean Copula behaves like a binary

operation

Commutative:

C u ,v =C v , u ,

u , v [ 0,1]

Associative:

C C u , v , w =C u , C v , w, u , v , w [0,1 ]

Order preserving:

C u1 , v 1 C u2 , v 2 ,

u 1u 2 , v 1 v 2 ,[0,1]

Archimedean Copulas

Example:

Let g t =1t ,

t [0,1 ]

C u , v =max uv1,0

Frchet Lower bound Copula is a kind of

Archimedean Copula.

Archimedean Copulas

Archimedean Copulas have a wide range of

applications for some reasons:

Easy to be constructed

Many families of copulas

belong to it

Many nice properties

study of probabilistic metric space, developing the

probabilistic version of triangle inequality.

Constructing Copulas

The Inverse Method

Geometric Methods

Constructing Copulas

The Inverse Method

Given a bivariate distribution function H

with continuous margins F and G, invert to

obtain a copula:

1

C u , v = H F u ,G v

Constructing Copulas

The Inverse Method (Example)

Gumbel's bivariate exponential distribution

x

x y axy

1e e e

0,

H a x , y ={

, x , y0

otherwise

F u=ln 1u

1

G v=ln 1v

a ln 1u ln 1v

C a u , v =uv 11u1v e

Constructing Copulas

Geometric Methods

Without reference to distribution

functions or random variables, we can

obtain the copula via the C-Volume of

rectangles in [0, 1]*[0, 1].

Constructing Copulas

Geometric Methods (Example)

(1, 1)

with support as the line

segments illustrated in the

graph.

(0, 0)

Constructing Copulas

Geometric Methods (Example)

continuous

(1, 1)

v

When

uav

C a u , v =V C [ 0, u][0,1 ]=u

a

(0, 0)

Constructing Copulas

Geometric Methods (Example)

continuous

(1, 1)

When

11avuav

v

(0, 0)

C a u , v =C a av , v =av

Constructing Copulas

Geometric Methods (Example)

continuous

(1, 1)

When

u11av

V C A=0

a

(0, 0)

=>

C a u , v =uv 1

Constructing Copulas

Geometric Methods (Example)

continuous

C a u , v =u

C a u , v =av

C a u , v =uv 1

0uav a

0avu11a v

a 11a vu1

C0: Frchet Lower bound Copula

Reference

Reference

1. Joe, H. (1997) Multivariate Models and Dependence

Concepts. Chapman & Hall

2. Nelsen, R.B. (1999), An Introduction to Copulas

3. Schweizer, B. and Wolff, EF (1981) On nonparametric

measures of dependence for random variables. Ann Statist

9:879-885

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