Time and Space Varying Copulas

TL;DR

This paper reviews dynamic copulas and introduces a novel n-copula model that varies over time and space using stochastic differential equations, capturing complex dependencies for applications in finance, bioinformatics, and environmental science.

Contribution

It proposes a new time and space varying copula model based on stochastic differential equations, extending the capability to model dependencies in multiple domains.

Findings

The model effectively captures dynamic dependencies in Markov diffusion processes.

Applicable to pricing basket derivatives in finance.

Potential uses in bioinformatics and environmental science.

Abstract

In this article we review existing literature on dynamic copulas and then propose an n-copula which varies in time and space. Our approach makes use of stochastic differential equations, and gives rise to a dynamic copula which is able to capture the dependence between multiple Markov diffusion processes. This model is suitable for pricing basket derivatives in finance and may also be applicable to other areas such as bioinformatics and environmental science.