Working Paper: CEPR ID: DP10809
Authors: Dante Amengual; Enrique Sentana
Abstract: We derive computationally simple and intuitive expressions for score tests of Gaussian copulas against Generalised Hyperbolic alternatives, including symmetric and asymmetric Student t, and Hermite polynomial expansions. We decompose our tests into third and fourth moment components, and obtain one-sided Likelihood Ratio analogues, whose asymptotic distribution we provide. We conduct Monte Carlo exercises to assess the finite sample properties of asymptotic and bootstrap versions of our tests. In an empirical application to CRSP stocks, we find that short-term reversals and momentum effects are better captured by non-Gaussian copulas. We estimate their parameters by indirect inference, and devise successful trading strategies.
Keywords: cokurtosis; coskewness; indirect inference; Kuhn-Tucker test; momentum strategies; nonlinear dependence; short-term reversals; supremum test; underidentified parameters
JEL Codes: C12; C46; C52; G11; G14
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| non-Gaussian copulas (C46) | short-term reversals and momentum effects (G41) |
| non-Gaussian copulas (C46) | successful trading strategies (G17) |
| Gaussian rank correlation (C10) | predicting stock performance (G17) |
| Gaussian copulas (C46) | insufficient capturing of dependencies (O36) |
| cokurtosis and coskewness (C10) | rejection of Gaussian copula (C46) |