Unraveling Financial Interconnections: A Methodical Investigation into the Application of Copula Theory in Modeling Asset Dependence
Keywords:
copula theory, stochastic model, dependence modeling, financial assets, method applicationAbstract
Copula theory, a branch of statistics and probability theory, focuses on characterizing and modeling the dependency structures between random variables. Within finance, copulas offer a versatile framework crucial for tasks like risk management, portfolio optimization, and derivative pricing. Despite its importance, applying copula theory in finance can be challenging due to its complexity and the unique features of financial time-series data. This method review explores the utilization of copula theory in modeling dependency among financial assets. It examines copula theory fundamentals, various modeling techniques, empirical applications in finance, future directions, and practical implementation. By synthesizing existing literature, this review aims to shed light on the strengths, limitations, and practical considerations of copula-based modeling within the finance domain.
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