Financial Engineering with Copulas Explained [Paperback]

This is a succinct guide to the application and modelling of dependence models or copulas in the financial markets. First applied to credit risk modelling, copulas are now widely used across a range of derivatives transactions, asset pricing techniques and risk models and are a core part of the financial engineer's toolkit.1. What are Copulas? 2. Which Rules for Handling Copulas Do I Need? 3. How to Measure Dependence? 4. What are Popular Families or Copulas? 5. How to Stimulate Multivariate Distributions? 6. How to Estimate Parameters of a Multivariate Model? 7. How to Deal with Uncertainty Concerning Dependence? 8. How to Construct a Portfolio-Default Model?

'This book is a very valuable source for modeling specialists in the financial industry. It follows a non-technical but mathematically rigorous approach. Many illustrations as well as examples help readers to develop a solid understanding of copula functions and their applications. Especially remarkable are the various parts of the book dealing with the simulation of copulas. In this way the book provides clearly elaborated tools for dependence modeling in financial engineering.'

Dr. Christian Bluhm, Chief Risk Officer and Spokesman of the Executive Board, FMS Wertmanagement

'Copula functions have been controversial mathematical tools in financial modeling. The example of CDOs is still hot in the public perception and has been debated for several years even in mainstream press. We discussed this ourselves in the 2010 book 'Credit Models and the Crisis'. It is good to see CDOs discussed here at the end of the book. More generally the authors, whose high technical standing in statistical distributions and copula functions is well known, take a middle path between hostility to copulas, stemming mostly from the abovementioned CDO case, and copula enthusiasts, who would like to employ copulas every time a dependence problem shows up.

The wrong way risk pl³“