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Multivariate Skewed Student's t Copula in the Analysis of Nonlinear and Asymmetric Dependence in the German Equity Market

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  • Sun Wei

    (University of Karlsruhe, Karlsruhe Institute of Technology, and GCFD)

  • Rachev Svetlozar

    (University of Karlsruhe, Karlsruhe Institute of Technology and UCSB)

  • Stoyanov Stoyan V.

    (FinAnalytica, Inc.)

  • Fabozzi Frank J.

    (Yale University)

Abstract

Analyzing comovements in equity markets is important for risk diversification in portfolio management. Copulas have several advantages compared to the linear correlation measure in modeling comovement. This paper introduces a copula ARMA-GARCH model for analyzing the comovement of indexes in German equity markets. The model is implemented with an ARMA-GARCH model for the marginal distributions and a copula for the joint distribution. After goodness-of-fit testing, we find that the skewed Student's t copula ARMA(1,1)-GARCH(1,1) model with Lévy fractional stable noise is superior to alternative models investigated in our study where we model the simultaneous comovement of six German equity market indexes. This model is also suitable for capturing the long-range dependence, tail dependence, and asymmetric correlation observed in German equity markets.

Suggested Citation

  • Sun Wei & Rachev Svetlozar & Stoyanov Stoyan V. & Fabozzi Frank J., 2008. "Multivariate Skewed Student's t Copula in the Analysis of Nonlinear and Asymmetric Dependence in the German Equity Market," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 12(2), pages 1-37, May.
    • Handle: RePEc:bpj:sndecm:v:12:y:2008:i:2:n:3
    DOI: 10.2202/1558-3708.1572
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    4. Desislava Chetalova & Marcel Wollschlager & Rudi Schafer, 2015. "Dependence structure of market states," Papers 1503.09004, arXiv.org, revised Jul 2015.
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    9. Fabozzi Frank J. & Stoyanov Stoyan V. & Rachev Svetlozar T., 2013. "Computational aspects of portfolio risk estimation in volatile markets: a survey," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 17(1), pages 103-120, February.
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