hard · Quantitative Finance prob-stats
Compare the joint crash probability of two assets under a Gaussian copula versus a t-copula with the same correlation ρ.
If the assets are in the far left tail, which statement correctly describes the behavior?
- The Gaussian copula will underestimate joint risk because it has zero tail dependence.
- The Gaussian copula is more conservative as it assumes fat tails in the dependency structure.
- Both copulas provide identical joint probabilities for a given correlation coefficient.
- The t-copula will underestimate joint risk as it converges to the normal distribution.
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