Testing the bivariate distribution of daily equity returns using copulas. An application to the Spanish stock market

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Testing the bivariate distribution of daily equity returns using copulas. An application to the Spanish stock market

Author Info

Oriol Roch Casellas
Antonio Alegre Escolano (Universitat de Barcelona)

Abstract

In this paper we deal with the identification of dependencies between time series of equity returns. Marginal distribution functions are assumed to be known, and a bivariate chi-square test of fit is applied in a fully parametric copula approach. Several families of copulas are fitted and compared with Spanish stock market data. The results show that the t-copula generally outperforms other dependence structures, and highlight the difficulty in adjusting a significant number of bivariate data series.

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Paper provided by Universitat de Barcelona. Espai de Recerca en Economia in its series Working Papers in Economics with number 143.

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Length: 18 pages
Date of creation: 2005
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Handle: RePEc:bar:bedcje:2005143

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Postal: Espai de Recerca en Economia, Facultat de CiÃ¨ncies EconÃ²miques. Tinent Coronel Valenzuela, Num 1-11 08034 Barcelona. Spain.
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This paper has been announced in the following NEP Reports:

NEP-ALL-2005-09-29 (All new papers)
NEP-CFN-2005-09-29 (Corporate Finance)
NEP-ETS-2005-09-29 (Econometric Time Series)

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Christian Genest & Jean-François Quessy & Bruno Rémillard, 2006. "Goodness-of-fit Procedures for Copula Models Based on the Probability Integral Transformation," Scandinavian Journal of Statistics, Danish Society for Theoretical Statistics, Finnish Statistical Society, Norwegian Statistical Association and Swedish Statistical Association, vol. 33(2), pages 337-366. [Downloadable!] (restricted)
U. Cherubini & E. Luciano, 2002. "Bivariate option pricing with copulas," Applied Mathematical Finance, Taylor and Francis Journals, vol. 9(2), pages 69-85, June. [Downloadable!] (restricted)
Andrew J. Patton, 2004. "On the Out-of-Sample Importance of Skewness and Asymmetric Dependence for Asset Allocation," Journal of Financial Econometrics, Oxford University Press, vol. 2(1), pages 130-168. [Downloadable!] (restricted)
Fernandez, C. & Steel, M.F.J., 1996. "On Bayesian modelling of fat tails and skewness," Discussion Paper 58, Tilburg University, Center for Economic Research. [Downloadable!]
Yanqin Fan & Xiaohong Chen & Andrew Patton, 2004. "(IAM Series No 003) Simple Tests for Models of Dependence Between Multiple Financial Time Series, with Applications to U.S. Equity Returns and Exchange Rates," FMG Discussion Papers dp483, Financial Markets Group. [Downloadable!] (restricted)
Linden, Mikael, 2001. "A Model for Stock Return Distribution," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 6(2), pages 159-69, April. [Downloadable!] (restricted)
François Longin, 2001. "Extreme Correlation of International Equity Markets," Journal of Finance, American Finance Association, vol. 56(2), pages 649-676, 04. [Downloadable!] (restricted)
Klugman, Stuart A. & Parsa, Rahul, 1999. "Fitting bivariate loss distributions with copulas," Insurance: Mathematics and Economics, Elsevier, vol. 24(1-2), pages 139-148, March. [Downloadable!] (restricted)

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