Factor copula models for multivariate data

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Factor copula models for multivariate data

TitleFactor copula models for multivariate data
Publication TypeJournal Article
Year of Publication2013
AuthorsKrupskii, P, Joe, H
JournalJournal of Multivariate Analysis
Volume120
Pagination85-101
Date PublishedSEP
Type of ArticleArticle
ISSN0047-259X
KeywordsConditional independence, Factor analysis, Pair-copula construction, Partial correlation, Tail asymmetry, Tail dependence, Truncated vine
AbstractGeneral conditional independence models ford observed variables, in terms of p latent variables, are presented in terms of bivariate copulas that link observed data to latent variables. The representation is called a factor copula model and the classical multivariate normal model with a correlation matrix having a factor structure is a special case. Dependence and tail properties of the model are obtained. The factor copula model can handle multivariate data with tail dependence and tail asymmetry, properties that the multivariate normal copula does not possess. It is a good choice for modeling high-dimensional data as a parametric form can be specified to have O(d) dependence parameters instead of O(d(2)) parameters. Data examples show that, based on the Akaike information criterion, the factor copula model provides a good fit to financial return data, in comparison with related truncated vine copula models. (C) 2013 Elsevier Inc. All rights reserved.
DOI10.1016/j.jmva.2013.05.001