I've developed a step by step procedure for estimating a copula based upon 2 stock time series returns but I don't understand and have not implemented one step that is discussed in most of the copula literature. Could someone please show me how to implement that step (#3), if it is necessary?
Step 1- Calculate the returns of each stock and then normalize using the Z-scores.
Step 2- Choose a suitable distribution for each stock, fit the distributions using MLE methods. I am calling the output of this step the marginals.
Step 3- (this is the step I don't understand on how to implement) Use the inverse probability transform or a uniform distribution transformation.
Step 4- Choose an appropriate copula, calculate its parameters using Kendall tau and/or other parameters. Use the marginals from step 2 OR should I be using output from step 3?