Implicit Copulas: An Overview

TL;DR

Implicit copulas are a versatile and scalable class of models for capturing dependence in high-dimensional data, with broad applications in econometrics and finance, supported by Bayesian estimation methods.

Contribution

This paper provides a comprehensive overview of implicit copulas, including their representations, estimation techniques, and recent developments in time series and regression contexts.

Findings

Implicit copulas effectively model high-dimensional dependence.

Bayesian methods facilitate parameter estimation and prediction.

Applications demonstrate advantages in macroeconomics and finance.

Abstract

Implicit copulas are the most common copula choice for modeling dependence in high dimensions. This broad class of copulas is introduced and surveyed, including elliptical copulas, skew $t$ copulas, factor copulas, time series copulas and regression copulas. The common auxiliary representation of implicit copulas is outlined, and how this makes them both scalable and tractable for statistical modeling. Issues such as parameter identification, extended likelihoods for discrete or mixed data, parsimony in high dimensions, and simulation from the copula model are considered. Bayesian approaches to estimate the copula parameters, and predict from an implicit copula model, are outlined. Particular attention is given to implicit copula processes constructed from time series and regression models, which is at the forefront of current research. Two econometric applications -- one from macroeconomic time series and the other from financial asset pricing -- illustrate the advantages of implicit copula models.