Copula Modelling of High-Dimensional Longitudinal Binary Response Data

Abstract: This thesis treats the modelling of a high-dimensional data set of longitudinal binary responses. The data consists of default indicators from different nations around the world as well as some explanatory variables such as exposure to underlying assets. The data used for the modelling is an aggregated term which combines several of the default indicators in the data set into one.  The modelling sets out from a portfolio perspective and seeks to find underlying correlations between the nations in the data set as well as see the extreme values produced by a portfolio with assets in the nations in the data set. The modelling takes a copula approach which uses Gaussian copulas to first formulate several different models mathematically and then optimize the parameters in the models to best fit the data set. Models A and B are optimized using standard stochastic gradient ascent on the likelihood function while model C uses variational inference and stochastic gradient ascent on the evidence lower bound for optimization. Using the different Gaussian copulas obtained from the optimization process a portfolio simulation is then done to examine the extreme values. The results show low correlations in models A and B while model C with it's additional regional correlations show slightly higher correlations in three of the subgroups. The portfolio simulations show similar tail behaviour in all three models, however model C produces more extreme risk measure outcomes in the form of higher VaR and ES.