A Brief Introduction

to Copulas
Speaker: Hua, Lei
February 24, 2009
Department of Statistics
University of Britis !o"umbia
Outline

#ntro$uction

Definition

%roperties

&rcime$ean !opu"as

!onstructin' !opu"as

(eference
Introduction
Introduction
)e *or$ Copula is a Latin
noun tat means ++& "ink, tie,
bon$++
,!asse""+s Latin Dictionary-
Introduction history

1959: The word Copula appeared for the

first time (Sklar 1959)

1981: The earliest paper relating copulas

to the study of dependence among random
variales (Schwei!er and "olff 1981)

199#$s: %opula ooster: &oe (199') and

(elson (1999))

199#$s *: +cademic literatures on how to

use copulas in risk management)
Introduction Why copula

(on,linear dependence

-e ale to measure dependence for heavy

tail distriutions

.ery fle/ile: parametric0 semi,parametric

or non,parametric

-e ale to study asymptotic properties of

dependence structures

%omputation is faster and stale with the

two,stage estimation

%an e more proailistic or more

statistical

others)))
Introduction Why copula
Example: X ~ lognormal(0, 1) and Y ~ lognormal(0, sigma^2)
Introduction
Joint distribution funtion
H x , y=P[ X x , Y y]
!arginal distribution funtions
F x=P[ X x] , G y=P[Y y]
For each pair (x, y), we can associate
three numbers: F(x), G(y) and H(x, y)
(x, y)
(1, 1)
(0, 0) F(x)
G(y)
Each pair of real number (x, y) leads to a point of
(F(x), G(y)) in the unit square [0, 1![0, 1
H(x, y)
Introduction
Introduction
)e mappin', .ic assi'ns te va"ue
of te /oint $istribution function to eac
or$ere$ pair of va"ues of mar'ina"
$istribution function is in$ee$ a copu"a0
Introduction
(x, y)
(1, 1)
(0, 0) F(x)
G(y)
H(x, y)
Copulas
Joint distribution function
"efinition
Definition informal
& 2-dimensional copula is a
$istribution function on 10, 23410, 23,
.it stan$ar$ uniform mar'ina"
$istributions0
Definition a generic example
#f ,X, Y - is a pair of continuous ran$om
variab"es .it $istribution function H,x, y- an$
mar'ina" $istributions Fx,x- an$ FY ,y-
respective"y, ten U 5 FX,x- ~ U,0, 2- an$ V 5
FY,y- 6 U,0, 2- an$ te $istribution function of
,U, V - is a copu"a0
Cu , v=PUu , V v=P X F
X
1
u, Y F
Y
1
v
Cu , v=H F
X
1
u , F
Y
1
v
Definition formal
Cu , 0=C0, v=0
Cu , 1=u C1, v=v
Cu
2
, v
2
Cu
1
, v
2
Cu
2
, v
1
Cu
1
, v
1
0
v
1
, v
2
, u
1
, u
2
[0,1] ; u
2
u
1
, v
2
v
1
(u2, 2)
(u1, 1)
2"#nreasing
Grounded
1$
2$
%$
C:[0, 1]
2
[0, 1]
#roperties
Properties
$olume of %ectan&le
V
H
=Hu
2,
v
2
Hu
1,
v
2
Hu
2,
v
1
H u
1,
v
1

(u2, 2)
(u1, 1)
Properties
'opula is the '($olume of rectan&le
[0,u![0,)
Cu , v=V
c
[0, u][0, v]
'opula assi&ns a number to each rectan&le
in [0,1![0,1, *hich is nonne&ati)e +
Properties
(0, 0)
(1, 1)
(u, )
& '
( )
Cu , v=V
c
[0, u][0, v]=V
c
AV
c
BV
c
CV
c
D
Properties
78amp"e: #n$epen$ent !opu"a
Cu
1
, u
2
=u
1
u
2
, u[ 0,1]
2
*+e grap+ of #ndependent )opula
000
002
004
009
00:
200
000
002
004
009
00:
200
000
002
004
009
00:
200
u2
u2
!#
Properties
Frchet !pper bound "opu#a
C
U
u
1,
u
2
=min {u
1,
u
2
}, u[0,1]
2
Frchet $ower bound "opu#a
C
L
u
1,
u
2
=max {0, u
1
u
2
1}, u[0,1]
2
Properties
Frchet $ower bound "opu#a Frchet !pper bound "opu#a
000
002
004
009
00:
200
000
002
004
009
00:
200
000
002
004
009
00:
200
u2
u2
!L
000
002
004
009
00:
200
000
002
004
009
00:
200
000
002
004
009
00:
200
u2
u2
!U
Properties
%ny copu#a wi## be bounded by Frchet
#ower and upper bound copu#as
C
L
u
1
, u
2
Cu
1
, u
2
C
U
u
1
, u
2
, u[0,1]
2
Properties
000
002
004
009
00:
200
000
002
004
009
00:
200
000
002
004
009
00:
200
u2
u2
!U#
Properties
&'#ar(s )heorem
Let H be a /oint $f .it mar'ina" $fs F an$ G,
)en tere e8ists a copu"a C suc tat
H u , v=CF u , Gv
If F and G are continuous,then the copula is
unique
Properties
*mportant "onse+uences

& copu"a $escribes o. mar'ina"s are tie$

to'eter

& /oint $f can be $ecompose$ into mar'ina"

$fs an$ copu"a

mar'ina" $fs an$ copu"a can be stu$ie$

separate"y ,e': ;L7 separate"y-

<iven a copu"a, .e can 'et many mu"tivariate

$istributions by se"ectin' $ifferent mar'ina" $fs
Properties

Surviva" copu"a

Functiona" #nvariance for monotone transform

=on>parametric measures of $epen$ence

)ai" $epen$ence

Simu"ation
,ther topics
,rchimedean 'opulas
Archimedean Copulas
Cu , v=g
[1]
g ug v
continuous, strict"y $ecreasin'
conve8 function
g :[0,1][ 0, ]
g 1=0
g
[1]
t ={
0, g 0t
g
1
t , 0t g 0
!eudo"inver!e of g
Archimedean Copulas
"ommutatie:
%ssociatie:
,rchimedean 'opula beha)es li-e a binary
operation
Cu , v=Cv , u , u , v[ 0,1]
CCu , v , #=Cu , Cv , #, u , v , #[0,1]
,rder preserin-:
Cu
1
, v
1
Cu
2
, v
2
, u
1
u
2
, v
1
v
2
,[0,1]
Archimedean Copulas
Example.
$et
gt =1t , t [0,1]
g
[1]
t =max1t , 0
Cu , v=max uv1,0
)hen
Frchet $ower bound "opu#a is a 'ind of
%rchimedean "opu#a.
Archimedean Copulas
,rchimedean 'opulas ha)e a *ide ran&e of
applications for some reasons.

Easy to be constructed

/any families of copulas

belon& to it

/any nice properties

,rchimedean 'opulas ori&inally appeared in the
study of probabilistic metric space, de)elopin& the
probabilistic )ersion of trian&le inequality0

1he In)erse /ethod

Geometric /ethods
'onstructin& 'opulas
Constructing Copulas
)he *nerse /ethod
<iven a bivariate $istribution function H
.it continuous mar'ins F an$ G, invert to
obtain a copu"a:
Cu , v=H F
1
u , G
1
v
Constructing Copulas
)he *nerse /ethod (0xamp#e)
Gumbel's bivariate exponential distribution
H
a
x , y={
0, ot$er#i!e
1e
x
e
y
e
xyaxy
, x , y0
F
1
u=ln1u
G
1
v=ln1v
C
a
u , v=uv11u1ve
a ln1u ln1v
Constructing Copulas
Geometric /ethods
2ithout reference to distribution
functions or random )ariables, *e can
obtain the copula )ia the '($olume of
rectan&les in [0, 1![0, 10
Constructing Copulas
Geometric /ethods (0xamp#e)
(0, 0)
(1, 1)
a
let Ca denote the copula
*ith support as the line
se&ments illustrated in the
&raph0
Constructing Copulas
(0, 0)
(1, 1)
a
u

Geometric /ethods (0xamp#e)

continuous
C
a
u , v=V
C
a
[ 0, u][0,1]=u
uav
1hen
Constructing Copulas
(0, 0)
(1, 1)
a
u

Geometric /ethods (0xamp#e)

continuous
C
a
u , v=C
a
av , v=av
1hen
11avuav
Constructing Copulas
(0, 0)
(1, 1)
a
u

Geometric /ethods (0xamp#e)

continuous
u11av
C
a
u , v=uv1
V
C
a
A=0 23
%
1hen
Constructing Copulas
Geometric /ethods (0xamp#e)
continuous
C
a
u , v=u 0uava
0avu11av C
a
u , v=av
a11avu1
C
a
u , v=uv1
C1: Frchet !pper bound "opu#a
C0: Frchet $ower bound "opu#a
%eference
Reference
20 ?oe, H0 ,299@- ;u"tivariate ;o$e"s an$ Depen$ence
!oncepts0 !apman A Ha""
20 =e"sen, (0B0 ,2999-, &n #ntro$uction to !opu"as
B0 Sc.eiCer, B0 an$ *o"ff, 7F ,29:2- Dn nonparametric
measures of $epen$ence for ran$om variab"es0 &nn Statist
9::@9>::E
13,45 678+