KILLED · cost > tail edge
Hypothesis
A copula captures non-linear, tail-dependent co-movement that linear cointegration misses; trading conditional-probability extremes of the copula beats z-score pairs.
Math — conditional copula signal
$$ h(u\mid v) = \frac{\partial C(u,v)}{\partial v},\quad \text{trade when } h\to 0 \text{ or } 1 $$
Method
Fit Student-t / Clayton copulas to pair return ranks, trade mispricing index extremes, costs applied.
Results
| Tail-dependence captured | yes |
| Extra signals vs z-score | few |
| Net after fees | − |
The copula does model tail dependence the z-score misses, but the incremental signals are too few to cover the extra turnover, and fit instability adds noise. Sophistication without net edge. Killed.
A more flexible dependence model is only worth it if the extra signals it finds pay for themselves. Elegance is not edge.