B0624
Title: Goodness of fit for regime-switching copula models with application to option pricing
Authors: MamadouYamar Thioub - HEC Montreal (Canada) [presenting]
Bouchra Nasri - University of Montreal (Canada)
Bruno N Remillard - HEC Montreal (Canada)
Abstract: Several time series are considered, and for each of them, an appropriate dynamic parametric model is fitted. This produces serially independent error terms for each time series. The dependence between these error terms is then modelled by a regime-switching copula. The EM algorithm is used for estimating the parameters and a sequential goodness of fit procedure based on Cramer-von Mises statistics is proposed to select the appropriate number of regimes. Numerical experiments are performed to assess the validity of the proposed methodology. As an example of application, we evaluate a European put-on max option on the returns of two assets. To facilitate the use of our methodology, we have built a R package HMMcopula available on CRAN.
