A monitoring procedure for detecting structural breaks in factor copula models

Abstract

Abstract We propose a new monitoring procedure based on moving sums (MOSUM) for detecting single or multiple structural breaks in factor copula models. The test compares parameter estimates from a rolling window to those from a historical data set and analyzes the behavior under the null hypothesis of no parameter change. The case of multiple breaks is also treated. In the model, the joint copula is given by the copula of random variables which arise from a factor model. This is particularly useful for analyzing high dimensional data. Parameters are estimated with the simulated method of moments (SMM). We analyze the behavior of the monitoring procedure in Monte Carlo simulations and a real data application. We consider an online procedure for predicting the day-ahead Value-at-risk based on the suggested monitoring procedure.