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, with the lower quantiles being of particular interest in financial applications concerned with risk. Tests located at the median provide an overall test of a changing relationship. The properties of various tests are compared and it is shown that they are still effective if pre-filtering is carried out to correct for changing volatility or, more generally, changing quantiles. Applying the tests to daily stock return indices in Korea and Thailand over the period 1995-9 indicates that the relationship between them is not constant over time.
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Bibliographic InfoPaper provided by Faculty of Economics, University of Cambridge in its series Cambridge Working Papers in Economics with number 0841.
Date of creation: Aug 2008
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Concordance; quantile; rank correlation; stationarity test; tail dependence.;
Other versions of this item:
- Fabio Busetti & Andrew Harvey, 2011. "When is a Copula Constant? A Test for Changing Relationships," Journal of Financial Econometrics, Society for Financial Econometrics, vol. 9(1), pages 106-131, Winter.
- 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
This paper has been announced in the following NEP Reports:
- NEP-ALL-2008-10-28 (All new papers)
- NEP-ECM-2008-10-28 (Econometrics)
- NEP-SEA-2008-10-28 (South East Asia)
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