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Conditional Dependency of Financial Series: The Copula-GARCH Model

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Author Info

  • Eric Jondeau

    (Banque de France, DEER)

  • Michael Rockinger

    (HEC-University of Lausanne)

Abstract

We develop a new methodology to measure conditional dependency between time series each driven by complicated marginal distributions. We achieve this by using copula functions that link marginal distributions, and by expressing the parameter of the copula as a function of predetermined variables. The marginal model is an autoregressive version of Hansen’s (1994) GARCH-type model with time-varying skewness and kurtosis. Here, we extend, to a dynamic setting, the research that fo-cuses on asymmetries in correlation during extreme events. We show that, for many market indices, dependency increases subsequent to large extreme realizations. Furthermore, for several index pairs, this increase is stronger after crashes. Our model has many potential applications such as VaR measurement and portfolio allocation in non-gaussian environments.

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Bibliographic Info

Paper provided by International Center for Financial Asset Management and Engineering in its series FAME Research Paper Series with number rp69.

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Date of creation: Dec 2002
Date of revision:
Handle: RePEc:fam:rpseri:rp69

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Related research

Keywords: International correlation; Stock indices; Skewed Student-t distribution;

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References

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Citations

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Cited by:
  1. Cyril Caillault, Dominique Guégan, 2009. "Forecasting VaR and Expected Shortfall Using Dynamical Systems: A Risk Management Strategy," Frontiers in Finance and Economics, SKEMA Business School, vol. 6(1), pages 26-50, April.
  2. Yang, Jingping & Cheng, Shihong & Zhang, Lihong, 2006. "Bivariate copula decomposition in terms of comonotonicity, countermonotonicity and independence," Insurance: Mathematics and Economics, Elsevier, vol. 39(2), pages 267-284, October.
  3. repec:hal:cesptp:halshs-00188248 is not listed on IDEAS
  4. repec:hal:cesptp:halshs-00368336 is not listed on IDEAS
  5. Dominique Guegan & Jing Zang, 2009. "Pricing bivariate option under GARCH-GH model with dynamic copula: application for Chinese market," The European Journal of Finance, Taylor & Francis Journals, vol. 15(7-8), pages 777-795.
  6. Michał Adam & Piotr Bańbuła & Michał Markun, 2013. "Dependence and contagion between asset prices in Poland and abroad. A copula approach," National Bank of Poland Working Papers 169, National Bank of Poland, Economic Institute.

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