Copula

AAA

DEFINITION of 'Copula'

A statistical measure that represents a multivariate uniform distribution, which examines the association or dependence between many variables. Although the statistical calculation of a copula was invented in 1957, it was not applied to financial markets and finance until the late '90s.

INVESTOPEDIA EXPLAINS 'Copula'

Copulas are a mathematical tool used in finance to help identify economic capital adequacy, market risk, credit risk and operational risk. Interdependence of returns of two or more assets is usually calculated using the correlation coefficient. However, correlation only works well with normal distributions, while distributions in financial markets are mostly skewed. The copula, therefore, has been applied to areas of finance such as option pricing and portfolio value-at-risk to deal with the skewness.

RELATED TERMS
  1. Credit Risk

    The risk of loss of principal or loss of a financial reward stemming ...
  2. Value At Risk - VaR

    A statistical technique used to measure and quantify the level ...
  3. Binomial Option Pricing Model

    An options valuation method developed by Cox, et al, in 1979. ...
  4. Default Risk

    The event in which companies or individuals will be unable to ...
  5. Kurtosis

    A statistical measure used to describe the distribution of observed ...
  6. Skewness

    Describe asymmetry from the normal distribution in a set of statistical ...
Related Articles
  1. Bonds & Fixed Income

    Corporate Bonds: An Introduction To Credit Risk

    Corporate bonds offer higher yields, but it's important to evaluate the extra risk involved before you buy.
  2. Insurance

    The Dangers Of Over-Diversifying Your Portfolio

    If you diversify too much, you might not lose much, but you won't gain much either.
  3. Active Trading

    Modern Portfolio Theory: Why It's Still Hip

    See why investors today still follow this old set of principles that reduce risk and increase returns through diversification.
  4. Economics

    How A Limited Government Affects A Country's Finances

    Countries with limited governments have fewer laws about what individuals and businesses can and can’t do. What's the net result?
  5. Personal Finance

    What is the average salary for an accountant?

    Learn about the average salaries of various accounting positions, and see the difference that an accounting degree makes in attaining higher wages.
  6. Fundamental Analysis

    Lognormal and Normal Distribution

    When and why do you use lognormal distribution or normal distribution for analyzing securities? Lognormal for stocks, normal for portfolio returns.
  7. Economics

    Is the Bureau of Labor Statistics accurate?

    Read this brief analysis of the accuracy of Bureau of Labor Statistics, including a summary of the types of reports issued and how they are compiled.
  8. Economics

    Where is cost of living lowest in the world?

    Learn how the cost of living is the lowest in India based on numbers derived from the CPI and organizations like Expatistan and Numbeo.
  9. Investing Basics

    How Does Goodwill Affect Financial Statements?

    Goodwill is a bit of a paradox--intangible, yet it is recorded as an asset on the purchasing company's balance sheet.
  10. Investing Basics

    Using Normal Distribution Formula To Optimize Your Portfolio

    Normal or bell curve distribution can be used in portfolio theory to help portfolio managers maximize return and minimize risk.

You May Also Like

Hot Definitions
  1. Deferred Revenue

    Advance payments or unearned revenue, recorded on the recipient's balance sheet as a liability, until the services have been ...
  2. Multinational Corporation - MNC

    A corporation that has its facilities and other assets in at least one country other than its home country. Such companies ...
  3. SWOT Analysis

    A tool that identifies the strengths, weaknesses, opportunities and threats of an organization. Specifically, SWOT is a basic, ...
  4. Simple Interest

    A quick method of calculating the interest charge on a loan. Simple interest is determined by multiplying the interest rate ...
  5. Special Administrative Region - SAR

    Unique geographical areas with a high degree of autonomy set up by the People's Republic of China. The Special Administrative ...
  6. Annual Percentage Rate - APR

    The annual rate that is charged for borrowing (or made by investing), expressed as a single percentage number that represents ...
Trading Center