Journal Article

Estimation of Copula Models With Discrete Margins via Bayesian Data Augmentation

Khaled, Mohamad A., Smith, Michael S.

2012

Overview

Estimation of copula models with discrete margins can be difficult beyond the bivariate case. We show how this can be achieved by augmenting the likelihood with continuous latent variables, and computing inference using the resulting augmented posterior. To evaluate this, we propose two efficient Markov chain Monte Carlo sampling schemes. One generates the latent variables as a block using a Metropolis-Hastings step with a proposal that is close to its target distribution, the other generates them one at a time. Our method applies to all parametric copulas where the conditional copula functions can be evaluated, not just elliptical copulas as in much previous work. Moreover, the copula parameters can be estimated joint with any marginal parameters, and Bayesian selection ideas can be employed. We establish the effectiveness of the estimation method by modeling consumer behavior in online retail using Archimedean and Gaussian copulas. The example shows that elliptical copulas can be poor at modeling dependence in discrete data, just as they can be in the continuous case. To demonstrate the potential in higher dimensions, we estimate 16-dimensional D-vine copulas for a longitudinal model of usage of a bicycle path in the city of Melbourne, Australia. The estimates reveal an interesting serial dependence structure that can be represented in a parsimonious fashion using Bayesian selection of independence pair-copula components. Finally, we extend our results and method to the case where some margins are discrete and others continuous. Supplemental materials for the article are also available online.

• Publisher: Taylor & Francis Group,Taylor & Francis Ltd
• Subject: Archimedean copula / Augmentation / Australia / Bayesian analysis / Bayesian pair-copula selection / Bicycle paths / Bicycles / Consumer behavior / Copula functions / Copulas / Data models / Discrete longitudinal data / Distribution functions / Economic models / Estimation / Financial margins / Inference / Markov analysis / Markov chain / Markov chain Monte Carlo / Maximum likelihood estimation / Modeling / Monte Carlo simulation / Multivariate analysis / Multivariate dependence / Multivariate discrete data / Parametric models / Sampling / Statistics / Theory and Methods / Variables / Vine copulas