Multivariate temporal dependence via mixtures of rotated copulas

Abstract

Parametric copula families have been known to flexibly capture various dependence patterns, e.g., either positive or negative dependence in either the lower or upper tails of bivariate distributions. In this paper, our objective is to construct a model that is adaptable enough to capture several of these features simultaneously in $m$ dimensions. We propose a mixture of $2^m$ rotations of a parametric copula that can achieve this goal. We illustrate the construction using the Clayton family but the concept is general and can be applied to other families. In order to include dynamic dependence regimes, the approach is extended to a time-dependent sequence of mixture copulas in which the mixture probabilities are allowed to evolve in time via a moving average and seasonal types of relationship. The properties of the proposed model and its performance are examined using simulated and real data sets.