Modelling Volatile Time Series with V-Transforms and Copulas
The York Management School, University of York, Freboys Lane, York YO10 5GD, UK
Risks 2021, 9(1), 14; https://doi.org/10.3390/risks9010014
Received: 29 November 2020
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Revised: 21 December 2020
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Accepted: 29 December 2020
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Published: 5 January 2021
(This article belongs to the Special Issue Risks: Feature Papers 2020)
An approach to the modelling of volatile time series using a class of uniformity-preserving transforms for uniform random variables is proposed. V-transforms describe the relationship between quantiles of the stationary distribution of the time series and quantiles of the distribution of a predictable volatility proxy variable. They can be represented as copulas and permit the formulation and estimation of models that combine arbitrary marginal distributions with copula processes for the dynamics of the volatility proxy. The idea is illustrated using a Gaussian ARMA copula process and the resulting model is shown to replicate many of the stylized facts of financial return series and to facilitate the calculation of marginal and conditional characteristics of the model including quantile measures of risk. Estimation is carried out by adapting the exact maximum likelihood approach to the estimation of ARMA processes, and the model is shown to be competitive with standard GARCH in an empirical application to Bitcoin return data.
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Keywords:
time series; volatility; probability-integral transform; ARMA model; copula
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MDPI and ACS Style
McNeil, A.J. Modelling Volatile Time Series with V-Transforms and Copulas. Risks 2021, 9, 14. https://doi.org/10.3390/risks9010014
AMA Style
McNeil AJ. Modelling Volatile Time Series with V-Transforms and Copulas. Risks. 2021; 9(1):14. https://doi.org/10.3390/risks9010014
Chicago/Turabian StyleMcNeil, Alexander J. 2021. "Modelling Volatile Time Series with V-Transforms and Copulas" Risks 9, no. 1: 14. https://doi.org/10.3390/risks9010014
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