Multivariate Pareto Distributions: Inference and Financial Applications

Abstract

Univariate Pareto distributions are extensively studied. In this article, we propose a Bayesian inference methodology in the context of multivariate Pareto distributions of the second kind (Mardia's type). Computational techniques organized around Gibbs sampling with data augmentation are proposed to implement Bayesian inference in practice. The new methods are shown to work well in artificial examples involving a trivariate distribution, and to an empirical application involving daily exchange rate data for four major currencies.

Keywords:

• Bayesian inference
• Econometrics
• Financial contagion
• Financial crises
• MCMC
• Multivariate Pareto distribution

Mathematics Subject Classification:

• 91G70
• 62F15
• 60J10
• 60J22
• 60E
• 91G80

Acknowledgment

This research project is co-financed by E.U.-European Social Fund (75%) and the Greek Ministry of Development – GSRT (25%). Research support is gratefully acknowledged.