The parametric copula used in this paper is the t-copula, which outperformed all but
one of the other parametric copulas we tested (model selection tests are presented in
section Dearden et al, 2006). Its parameters are simple to interpret and it is relatively
straightforward to estimate and simulate, making it considerably attractive
га
t*j117
The t-topula is the dependence structure implicit in a bivariate t distribution.34 It has
two parameters: the correlation parameter, ρ, and the degrees of freedom parameter, ν.
These can be broadly interpreted as describing the overall level of immobility in the
distribution and the excess immobility in the tails of the distribution. The function,
describes the way in which we restrict the copula parameters to depend on experience
and the observable characteristics. We assume the following functional forms:

\* MERGEFORMAT (.)

where and are monotonic functions designed to keep ρ and ν inside their respective
ranges:

Obj121
\* MERGEFORMAT (.)
34 For detailed information on the t-copula, including a formal definition, see Demarta and McNeil
(2005).
38
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