Introduction
Correlation trading denotes the trading activity aimed at exploiting changes in correlation or more generally in the dependence structure of assets or risk factors. Likewise, correlation risk is defined as the exposure to losses triggered by changes in correlation. The copula function technique, which enables analyzing the dependence structure of a joint distribution independently from the marginal distributions, is the ideal tool to assess the impact of changes in market comovements on the prices of assets and the amount of risk in a financial position. As far as the prices of assets are concerned, copula functions enable pricing multivariate products consistently with the prices of univariate products. As for risk management, copula functions enable assessing the degree of diversification in a financial portfolio as well as the sensitivity of risk measures to changes in the dependence structure of risk factors. The concept of consistency between univariate and...
This is a preview of subscription content, log in via an institution to check access.
Access this chapter
Tax calculation will be finalised at checkout
Purchases are for personal use only
References and Further Reading
Bouyé E, Durrleman V, Nikeghbali A, Riboulet G, Roncalli T (2000) Copulas for finance: a reading guide and some applications. Groupe de Recherche, Opérationnelle, Crédit Lyonnais. Working paper
Chen X, Wu SB, Yi Y (2009) Efficient estimation of copula-based semiparametric Markov models. Ann Stat 37(6B):4214–4253
Cherubini U, Luciano E (2002) Bivariate option pricing with copulas. Appl Math Finance 9:69–86
Cherubini U, Romagnoli S (2009) Computing the volume of n-dimensional copulas. Appl Math Finance 16(4):307–314
Cherubini U, Romagnoli S (2010) The dependence structure of running maxima and minima: results and option pricing applications. Mathematical Finance 20(1):35–58
Cherubini U, Luciano E, Vecchiato W (2004) Copula methods in finance. Wiley Finance Series, Chichester
Cherubini U, Mulinacci S, Romagnoli S (2008) A copula-based model of the term structure of CDO tranches. In: Hardle WK, Hautsch N, Overbeck L (eds) Applied quantitative finance. Springer, Berlin, pp 69–81
Cherubini U, Mulinacci S, Romagnoli S (2009) A copula-based model of speculative price dynamics. University of Bologna, Berlin
Darsow WF, Nguyen B, Olsen ET (1992) Copulas and Markov processes. Illinois J Math 36:600–642
Embrechts P, Lindskog F, McNeil AJ (2003) Modelling dependence with copulas with applications to risk management. In: Rachev S (ed) A handbook of heavy tailed distributions in finance. Elsevier, Amsterdam, pp 329–384
Gregory J, Laurent JP (2005) Basket defaults, CDOs and factor copulas. J Risk 7(4):103–122
Ibragimov R (2005) Copula based characterization and modeling for time series. Economet Theory 25:819–846
Kallsen J, Tankov P (2006) Characterization of dependence of multidimensional Lévy processes using Lévy copulas. J Multivariate Anal 97:1151–1172
Li D (2000) On default correlation: a copula function approach. J Fixed Income 9:43–54
Patton A (2002) Modelling asymmetric exchange rate dependence. Int Econ Rev 47(2):527–556
Rosemberg J (2003) Non parametric pricing of multivariate contingent claims federal reserve bank of New York staff reports, n. 162
Van Der Goorberg R, Genest C, Werker B (2005) Bivariate option pricing using dynamic copula models. Insur Math Econ 37:101–114
Author information
Authors and Affiliations
Editor information
Editors and Affiliations
Rights and permissions
Copyright information
© 2011 Springer-Verlag Berlin Heidelberg
About this entry
Cite this entry
Umberto, C. (2011). Copulas in Finance. In: Lovric, M. (eds) International Encyclopedia of Statistical Science. Springer, Berlin, Heidelberg. https://doi.org/10.1007/978-3-642-04898-2_192
Download citation
DOI: https://doi.org/10.1007/978-3-642-04898-2_192
Published:
Publisher Name: Springer, Berlin, Heidelberg
Print ISBN: 978-3-642-04897-5
Online ISBN: 978-3-642-04898-2
eBook Packages: Mathematics and StatisticsReference Module Computer Science and Engineering