When is a Copula Constant? A Test for Changing Relationships
AbstractA copula defines the probability that observations from two time series lie below given quantiles. It is proposed that stationarity tests constructed from indicator variables be used to test against the hypothesis that the copula is changing over time. Tests associated with different quantiles may point to changes in different parts of the copula. The tests are still effective when prefiltering is carried out to correct for persistent changes in volatility. However, a "median quadrant association test" that is robust to changing volatility provides a good overall test against a time-varying copula. An empirical illustration on financial contagion is provided. (JEL: C12, G32) Copyright The Author 2010. Published by Oxford University Press. All rights reserved. For permissions, please e-mail: email@example.com, Oxford University Press.
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Bibliographic InfoArticle provided by Society for Financial Econometrics in its journal Journal of Financial Econometrics.
Volume (Year): 9 (2011)
Issue (Month): 1 (Winter)
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Other versions of this item:
- Busetti, F. & Harvey, A., 2008. "When is a copula constant? A test for changing relationships," Cambridge Working Papers in Economics 0841, Faculty of Economics, University of Cambridge.
- C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
- G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
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