medium · Quantitative Finance prob-stats
In the context of dependence modeling, why might a Gaussian copula understate the risk of a simultaneous market crash compared to a t-copula?
- The Gaussian copula can only be calibrated when every pairwise correlation is positive.
- The Gaussian copula has zero tail dependence, meaning extreme events decouple at the limit.
- The t-copula is a specialized tool reserved strictly for pricing interest rate derivatives.
- Copulas of the Gaussian family cannot be paired with assets having differing marginal distributions.
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