This file is part of IDEAS, which uses RePEc data


[ Papers | Articles | Software | Books | Chapters | Authors | Institutions | JEL Classification | NEP reports | Search | New papers by email | Author registration | Rankings | Volunteers | FAQ | Blog | Help! ]

Nonlinear Term Structure Dependence: Copula Functions, Empirics, and Risk Implications

Author info | Abstract | Publisher info | Download info | Related research | Statistics
Author Info
Markus Junker
Alexander Szimayer
Niklas Wagner

Additional information is available for the following registered author(s):

Abstract

This paper documents nonlinear cross-sectional dependence in the term structure of U.S. Treasury yields and points out risk management implications. The analysis is based on a Kalman filter estimation of a two-factor affine model which specifies the yield curve dynamics. We then apply a broad class of copula functions for modeling dependence in factors spanning the yield curve. Our sample of monthly yields in the 1982 to 2001 period provides evidence of upper tail dependence in yield innovations; i.e., large positive interest rate shocks tend to occur under increased dependence. In contrast, the best fitting copula model coincides with zero lower tail dependence. This asymmetry has substantial risk management implications. We give an example in estimating bond portfolio loss quantiles and report the biases which result from an application of the normal dependence model.

Download Info
To download:

If you experience problems downloading a file, check if you have the proper application to view it first. Information about this may be contained in the File-Format links below. 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://129.3.20.41/eps/em/papers/0401/0401007.pdf
File Format: application/pdf
File Function:
Download Restriction: no

Publisher Info
Paper provided by EconWPA in its series Econometrics with number 0401007.

Download reference. The following formats are available: HTML (with abstract), plain text (with abstract), BibTeX, RIS (EndNote, RefMan, ProCite), ReDIF
Length: 50 pages
Date of creation: 30 Jan 2004
Date of revision:
Handle: RePEc:wpa:wuwpem:0401007

Note: Type of Document - pdf; prepared on win00; to print on laserjet; pages: 50
Contact details of provider:
Web page: http://129.3.20.41

For technical questions regarding this item, or to correct its listing, contact: (EconWPA).

Related research
Keywords: affine term structure models; nonlinear dependence; copula functions; tail dependence; value-at-risk;

Find related papers by JEL classification:
C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: General - - - Estimation
G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Mortgages

This paper has been announced in the following NEP Reports:

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Chan, K C, et al, 1992. " An Empirical Comparison of Alternative Models of the Short-Term Interest Rate," Journal of Finance, American Finance Association, vol. 47(3), pages 1209-27, July. [Downloadable!] (restricted)
  2. Vasicek, Oldrich, 1977. "An equilibrium characterization of the term structure," Journal of Financial Economics, Elsevier, vol. 5(2), pages 177-188, November. [Downloadable!] (restricted)
  3. Simon Babbs & K. Nowman, 1998. "Econometric Analysis of a Continuous Time Multi-Factor Generalized Vasicek Term Structure Model: International Evidence," Asia-Pacific Financial Markets, Springer, vol. 5(2), pages 159-183, May. [Downloadable!] (restricted)
  4. Andrew J. Patton, 2001. "Modelling Time-Varying Exchange Rate Dependence Using the Conditional Copula," University of California at San Diego, Economics Working Paper Series 2001-09, Department of Economics, UC San Diego. [Downloadable!]
  5. Cox, John C & Ingersoll, Jonathan E, Jr & Ross, Stephen A, 1985. "A Theory of the Term Structure of Interest Rates," Econometrica, Econometric Society, vol. 53(2), pages 385-407, March. [Downloadable!] (restricted)
  6. Hans Dewachter & Marco Lyrio & Konstantijn Maes, 2001. "The Effect of Monetary Unification on German Bond Markets," International Economics Working Papers Series wpie005, Katholieke Universiteit Leuven, Centrum voor Economische Studiën, International Economics. [Downloadable!]
    Other versions:
  7. Rockinger, M. & Jondeau, E., 2001. "Conditional Dependency of Financial Series: An Application of Copulas," Documents de Travail 82, Banque de France. [Downloadable!]
  8. ROCKINGER, Michael & JONDEAU, Eric, 2001. "Conditional dependency of financial series : an application of copulas," Les Cahiers de Recherche 723, HEC Paris. [Downloadable!]
  9. Longstaff, Francis A & Schwartz, Eduardo S, 1992. " Interest Rate Volatility and the Term Structure: A Two-Factor General Equilibrium Model," Journal of Finance, American Finance Association, vol. 47(4), pages 1259-82, September. [Downloadable!] (restricted)
  10. Babbs, Simon H. & Nowman, K. Ben, 1999. "Kalman Filtering of Generalized Vasicek Term Structure Models," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 34(01), pages 115-130, March. [Downloadable!]
  11. Ang, Andrew & Bekaert, Geert, 2002. "Short rate nonlinearities and regime switches," Journal of Economic Dynamics and Control, Elsevier, vol. 26(7-8), pages 1243-1274, July. [Downloadable!] (restricted)
  12. Dong-Hyun Ahn & Robert F. Dittmar, 2002. "Quadratic Term Structure Models: Theory and Evidence," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 15(1), pages 243-288, March.
  13. White, Halbert, 1982. "Maximum Likelihood Estimation of Misspecified Models," Econometrica, Econometric Society, vol. 50(1), pages 1-25, January. [Downloadable!] (restricted)
  14. Fama, Eugene F & Bliss, Robert R, 1987. "The Information in Long-Maturity Forward Rates," American Economic Review, American Economic Association, vol. 77(4), pages 680-92, September. [Downloadable!] (restricted)
  15. Ait-Sahalia, Yacine, 1996. "Testing Continuous-Time Models of the Spot Interest Rate," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 9(2), pages 385-426. [Downloadable!] (restricted)
    Other versions:
Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Manner, Hans, 2007. "Estimation and Model Selection of Copulas with an Application to Exchange Rates," Research Memoranda 056, Maastricht : METEOR, Maastricht Research School of Economics of Technology and Organization. [Downloadable!]
  2. Koedijk, Kees & Kole, Erik & Verbeek, Marno, 2006. "Selecting Copulas for Risk Management," CEPR Discussion Papers 5652, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  3. Viviana Fernández, 2007. "Multi-period hedge ratios for a multi-asset portfolio when accounting for returns comovement," Documentos de Trabajo 242, Centro de Economía Aplicada, Universidad de Chile. [Downloadable!]
  4. Hafner, Christian M. & Manner, Hans, 2008. "Dynamic stochastic copula models: Estimation, inference and applications," Research Memoranda 043, Maastricht : METEOR, Maastricht Research School of Economics of Technology and Organization. [Downloadable!]
Statistics
Access and download statistics

Did you know? IDEAS is not the only service displaying RePEc data. Choose on RePEc which service fits your needs best.

This page was last updated on 2009-11-20.

This information is provided to you by IDEAS at the Department of Economics, College of Liberal Arts and Sciences, University of Connecticut using RePEc data on a server sponsored by the Society for Economic Dynamics.