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Conditional dependency of financial series : an application of copulas

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Author Info

  • ROCKINGER, Michael
  • JONDEAU, Eric

    (Banque de France, DEER)

Abstract

We develop a new methodology that measures conditional dependency. We achieve this by using copula functions that link marginal distributions, here chosen to obey a GARCH-type model with time-varying skewness and kurtosis. We apply this model to daily returns of stock-market indices. We find strong evidence of persistence in dependency both for local currency and $ US denominated series. For European stock markets, we also find evidence that large simultaneous returns of either sign lead to higher subsequent dependency. We show that dependency changes through time, as well. For stock markets within Europe, dependency increased whereas it decreased since the mid 90s when involving the S&P 500 or the Nikkei. We also suggest extensions for conditional asset pricing models involving time variation of co-skewness and co-kurtosis.

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Bibliographic Info

Paper provided by HEC Paris in its series Les Cahiers de Recherche with number 723.

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Length: 43 pages
Date of creation: 01 Feb 2001
Date of revision:
Handle: RePEc:ebg:heccah:0723

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Postal: HEC Paris, 78351 Jouy-en-Josas cedex, France
Web page: http://www.hec.fr/
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Related research

Keywords: international correlation; market integration; Arch; stock indices; exchange rates;

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References

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Citations

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Cited by:
  1. Söehnke Bartram & Stephen Taylor & Yaw-Huei Wang, 2004. "The Euro and European Financial Market Integration," Money Macro and Finance (MMF) Research Group Conference 2004 49, Money Macro and Finance Research Group, revised 13 Oct 2004.
  2. Markus Junker & Alexander Szimayer & Niklas Wagner, 2004. "Nonlinear Term Structure Dependence: Copula Functions, Empirics, and Risk Implications," Econometrics 0401007, EconWPA.
  3. Hashmi, Aamir R. & Tay, Anthony S., 2007. "Global regional sources of risk in equity markets: Evidence from factor models with time-varying conditional skewness," Journal of International Money and Finance, Elsevier, vol. 26(3), pages 430-453, April.
  4. Fortin, Ines & Kuzmics, Christoph, 2002. "Tail-Dependence in Stock-Return Pairs," Economics Series 126, Institute for Advanced Studies.
  5. Claudio Morana, 2006. "International Stock Markets Comovements: the Role of Economic and Financial Integration," ICER Working Papers 25-2006, ICER - International Centre for Economic Research.
  6. Junker, Markus & Szimayer, Alex & Wagner, Niklas, 2006. "Nonlinear term structure dependence: Copula functions, empirics, and risk implications," Journal of Banking & Finance, Elsevier, vol. 30(4), pages 1171-1199, April.
  7. Morana, Claudio & Beltratti, Andrea, 2008. "Comovements in international stock markets," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 18(1), pages 31-45, February.
  8. Yanqin Fan & Xiaohong Chen, 2004. "Estimation of Copula-Based Semiparametric Time Series Models," Econometric Society 2004 Far Eastern Meetings 559, Econometric Society.
  9. Rodriguez, Juan Carlos, 2007. "Measuring financial contagion: A Copula approach," Journal of Empirical Finance, Elsevier, vol. 14(3), pages 401-423, June.
  10. Chris Brooks & Simon P. Burke & Gita Persand, 2002. "Augoregressive Conditional Kurtosis," ICMA Centre Discussion Papers in Finance icma-dp2002-05, Henley Business School, Reading University.
  11. Aamir R. Hashmi & Anthony S. Tay, 2001. "Global and Regional Sources of Risk in Equity Markets: Evidence from Factor Models with Time-Varying Conditional Skewness," Departmental Working Papers wp0116, National University of Singapore, Department of Economics.
  12. Shlomo Yitzhaki, 2003. "Gini’s Mean difference: a superior measure of variability for non-normal distributions," Metron - International Journal of Statistics, Dipartimento di Statistica, Probabilità e Statistiche Applicate - University of Rome, vol. 0(2), pages 285-316.
  13. Patton, Andrew J, 2001. "Estimation of Copula Models for Time Series of Possibly Different Length," University of California at San Diego, Economics Working Paper Series qt3fc1c8hw, Department of Economics, UC San Diego.
  14. Ane, Thierry & Labidi, Chiraz, 2006. "Spillover effects and conditional dependence," International Review of Economics & Finance, Elsevier, vol. 15(4), pages 417-442.
  15. Xiaohong Chen & Yanqin Fan, 2002. "Estimation of Copula-Based Semiparametric Time Series Models," Vanderbilt University Department of Economics Working Papers 0226, Vanderbilt University Department of Economics, revised Oct 2004.
  16. Andrew J. Patton, 2006. "Estimation of multivariate models for time series of possibly different lengths," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 21(2), pages 147-173.

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