Copulas and long memory

Abstract

This paper focuses on the analysis of persistence properties of copula-based time series. We obtain theoretical results that demonstrate that Gaussian and Eyraud-Farlie-Gumbel-Morgenstern copulas always produce short memory stationary Markov processes. We further show via simulations that, in finite samples, stationary Markov processes, such as those generated by Clayton copulas, may exhibit a spurious long memory-like behavior on the level of copulas, as indicated by standard methods of inference and estimation for long memory time series. We also discuss applications of copula-based Markov processes to volatility modeling and the analysis of nonlinear dependence properties of returns in real financial markets that provide attractive generalizations of GARCH models. Among other conclusions, the results in the paper indicate non-robustness of the copula-level analogues of standard procedures for detecting long memory on the level of copulas and emphasize the necessity of developing alternative inference methods.