Managing Risk with a Realized Copula Parameter

A dynamic copula model is introduced, in which the copula structure is inferred from the realized covariance matrix estimated from within-day high-frequency data. The estimation is carried out in a method-of-moments fashion using Hoeding's lemma. Applying this procedure day by day gives rise to a time series of daily copula parameters which can be approximated by an autoregressive time series model. This allows one to capture time-varying dependence. In an application to portfolio risk-management, it is found that this time-varying realized copula model exhibits very good forecasting properties for the one-day ahead value at risk.

The working paper version of this paper ("Realized Copula") is found on http://www1.vwa.unisg.ch/RePEc/usg/econwp/EWP-1214.pdf