CD-vine model for capturing complex dependence

ABSTRACT

Copula based finite mixture models allow us to capture the dependence between random variables more flexibly. Although bivariate case of finite mixture models has been commonly studied, limited efforts have been spent on finite mixture of vines. Instead of using classical mixture models, it is possible to incorporate C-vines into the D-vine model (CD-vine) to understand both the dependence among the variables over different time points. The aim of this study is to create a CD-vine mixture model expressing the dependencies between variables in temporal order. To achieve this, cumulative distribution function values generated within the time components are tied together with D-vine probabilistically. With this approach, dependence structure between variables at each time point is explained by C-vine and the dependence among the time points is captured by the D-vine model. The performance of the proposed CD-vine model is validated using simulated data and applied on four stock market indices.

Keywords:

• Mixture model
• C-vine
• D-vine
• CD-vine mixture
• stock market indices

Disclosure statement

No potential conflict of interest was reported by the author(s).

Data availability statement

The considered data set in this study is available via https://stat.ethz.ch/R-manual/R-devel/library/datasets/html/EuStockMarkets.html.