Copula-based deviation measure of cointegrated financial assets

Abstract

This study outlines a comprehensive methodology utilizing copulas to discern inconsistencies in the behavior exhibited by pairs of financial assets. It introduces a robust approach to establishing the interrelationship between the returns of these assets, exploring potential measures of dependence among the stochastic variables represented by these returns. Special emphasis is placed on scrutinizing the traditional measure of dependence, namely the correlation coefficient, delineating its limitations. Furthermore, the study articulates an alternative methodology that offers enhanced stability and informativeness in appraising the relationship between financial instrument returns.