Copulae as a New Tool in Financial Modelling

15 Pages Posted: 29 Aug 2005

See all articles by Elisa Luciano

Elisa Luciano

Collegio Carlo Alberto; University of Turin - Department of Statistics and Applied Mathematics

Marina Marena

University of Eastern Piedmont

Date Written: 2002

Abstract

The paper presents an overview of financial applications of copulas. Copulas permit to represent joint distribution functions by splitting the marginal behavior, embedded in the marginal distributions, from the dependence, captured by the copula itself. The splitting proves to be very helpful not only in the modelling phase, but also in the estimation or simulation one. Essentially, it provides a straighforward way to extend financial modelling from the usual joint normality assumption to more general joint distributions, even preserving the normality assumption on the marginals. The paper puts into evidence the advantages of the copula representation with respect to the joint distribution one, with special reference to applications in pricing and risk measurement.

Keywords: Copula functions, multivariate risks, joint distributions

Suggested Citation

Luciano, Elisa and Marena, Marina, Copulae as a New Tool in Financial Modelling (2002). Available at SSRN: https://ssrn.com/abstract=787624 or http://dx.doi.org/10.2139/ssrn.787624

Elisa Luciano

Collegio Carlo Alberto ( email )

via Real Collegio 30
Moncalieri, Torino 10024
Italy

HOME PAGE: http://www.carloalberto.org/people/faculty/fellows/luciano/

University of Turin - Department of Statistics and Applied Mathematics ( email )

Corso Unione Sovietica 218 bis
Turin, I-10122
Italy
+ 39 011 6705230 (Phone)

Marina Marena (Contact Author)

University of Eastern Piedmont ( email )

Corso Borsalino 50
Department of Economics and Quantitative Methods
15100 Alessandria
Italy
+39 011 6706275 (Phone)

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