Large Skew-t Copula Models and Asymmetric Dependence in Intraday Equity Returns

원문 초록

Skew-t copula models are attractive for the modeling of financial data because they allow for asymmetric and extreme tail dependence. We show that the copula implicit in the skew-t distribution of Azzalini and Capitanio (2003) allows for a higher level of pairwise asymmetric dependence than two popular alternative skew-t copulas. Estimation of this copula in high dimensions is challenging, and we propose a fast and accurate Bayesian variational inference (VI) approach to do so. The method uses a generative representation of the skew-t distribution to define an augmented posterior that can be approximated accurately. A stochastic gradient ascent algorithm is used to solve the variational optimization. The methodology is used to estimate skew-t factor copula models with up to 15 factors for intraday returns from 2017 to 2021 on 93 U.S. equities. The copula captures substantial heterogeneity in asymmetric dependence over equity pairs, in addition to the variability in pairwise correlations. In a moving window study we show that the asymmetric dependencies also vary over time, and that intraday predictive densities from the skew-t copula are more accurate than those from benchmark copula models. Portfolio selection strategies based on the estimated pairwise asymmetric dependencies improve performance relative to the index.