Advanced Search
MyIDEAS: Login to save this paper or follow this series

Modelling Overnight and Daytime Returns Using a Multivariate GARCH-Copula Model

Contents:

Author Info

  • Long Kang

    ()
    (The Options Clearing Corporation)

  • Simon H. Babbs

    ()
    (The Options Clearing Corporation)

Registered author(s):

    Abstract

    We introduce a multivariate GARCH-Copula model to describe joint dynamics of overnight and daytime returns for multiple assets. The conditional mean and variance of individual overnight and daytime returns depend on their previous realizations through a variant of GARCH specification, and two Student’s t copulas describe joint distributions of both returns respectively. We employ both constant and time-varying correlation matrices for the t copulas and with the time-varying case the dependence structure of both returns depends on their previous dependence structures through a DCC specification. We estimate the model by a two-step procedure, where marginal distributions are estimated in the first step and copulas in the second. We apply our model to overnight and daytime returns of SPDR ETFs of nine major sectors and briefly illustrate its use in risk management and asset allocation. Our empirical results show higher mean, lower variance, fatter tails and lower correlations for overnight returns than daytime returns. Daytime returns are significantly negatively correlated with previous overnight returns. Moreover, daytime returns depend on previous overnight returns in both conditional variance and correlation matrix (through a DCC specification). Most of our empirical findings are consistent with the asymmetric information argument in the market microstructure literature. With respect to econometric modelling, our results show a DCC specification for correlation matrices of t copulas significantly improves the fit of data and enables the model to account for time-varying dependence structure.

    Download Info

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
    File URL: http://www.iub.edu/~caepr/RePEc/PDF/2010/CAEPR2010-008.pdf
    Download Restriction: no

    Bibliographic Info

    Paper provided by Center for Applied Economics and Policy Research, Economics Department, Indiana University Bloomington in its series Caepr Working Papers with number 2010-008.

    as in new window
    Length: 22 pages
    Date of creation: Jun 2010
    Date of revision:
    Handle: RePEc:inu:caeprp:2010-008

    Contact details of provider:
    Postal: Wylie Hall Room 105, Bloomington, IN 47405-6620
    Phone: 812-855-1021
    Fax: 812-855-3736
    Email:
    Web page: http://www.iub.edu/~caepr
    More information through EDIRC

    Related research

    Keywords:

    This paper has been announced in the following NEP Reports:

    References

    No references listed on IDEAS
    You can help add them by filling out this form.

    Citations

    Lists

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    Statistics

    Access and download statistics

    Corrections

    When requesting a correction, please mention this item's handle: RePEc:inu:caeprp:2010-008. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Center for Applied Economics and Policy Research).

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.