medium · Frm Part 2 Market Risk
A risk manager is comparing the properties of the Gaussian copula and the Student-t copula for a credit portfolio.
Which of the following statements correctly identifies a structural deficiency of the Gaussian copula in modeling joint defaults during a systemic crisis?
- Increasing the correlation parameter ρ in a Gaussian copula is a sufficient remedy for capturing tail clustering.
- The Gaussian copula exhibits zero tail dependence for any correlation coefficient ρ < 1.
- The Gaussian copula is only valid if the underlying asset returns follow a Student-t distribution.
- The Gaussian copula overstates the probability of joint defaults because it assumes normal marginals.
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