Bayesian Hierarchical Copula Models with a Dirichlet–Laplace Prior

Abstract

We discuss a Bayesian hierarchical copula model for clusters of financial time series. A similar approach has been developed in recent paper. However, the prior distributions proposed there do not always provide a proper posterior. In order to circumvent the problem, we adopt a proper global–local shrinkage prior, which is also able to account for potential dependence structures among different clusters. The performance of the proposed model is presented via simulations and a real data analysis.

Keywords

• global–local shrinkage prior
• MCMC
• model-based clustering
• GARCH