Gaussian copula

The Gaussian copula was gainfully employed prior to the credit crisis, and it has pretty much been shamed. Mathematically, it's an elegant way to join marginal distributions and handle default correlation. But it requires too many simplifying assumptions.

Category:

Education

Tags:

• Gaussian
• copula
• distribution
• normal
• credit
• crisis

[RefUser]

how did you make the graph?

[bionicturtledotcom]

@RefUser It's just excel (assuming you don't mean the officedraw or conceptdraw at the beginning). And I do (totally) agree with oringent's technical criticism: it's really a graph of bivariate normal pdf. Thanks David

[RefUser]

@bionicturtledotcom could you please be more spesific? unfortunately, i never did these kind of graphs before...

[bionicturtledotcom]

@RefUser as it's an approximation, i can't describe the calcs in < 500 characters (nor do i have the time). But i add a link to the XLS. I think i can share files now by linking to the dropbox file, so look for the excel soon, thanks, David

[lukegranger89]

@benzbubblecat u makin a sexual references

[benzbubblecat]

"very stubby shaft"

[RefUser]

@bionicturtledotcom thanks!

[oringent]

For a correct explanation of Gaussian Copula see Wikipedia. Incidentally, a copula is not a density (as graphed here) but a cumulative distribution function with support in some "n dimensional [0,1] space"

[oringent]

What you are graphing there is actually not the copula but the bivariate normal pdf. The marginals of the copula are continuous uniform[0,1] distributions. The whole idea of copulas is to isolate the dependence structure from the marginals. It is completely irrelevant weather or not financial returns are normal. Using Gaussian Copulas to model financial assets does not make this assumption, it only makes the assumption that the dependence structure is well approximated by the Gaussian copula.

[Sail17]

great explanation