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Multivariate Skewed Student's t Copula in the Analysis of Nonlinear and Asymmetric Dependence in the German Equity Market

Listed author(s):
  • Sun Wei

    ()

    (University of Karlsruhe, Karlsruhe Institute of Technology, and GCFD)

  • Rachev Svetlozar

    ()

    (University of Karlsruhe, Karlsruhe Institute of Technology and UCSB)

  • Stoyanov Stoyan V.

    ()

    (FinAnalytica, Inc.)

  • Fabozzi Frank J.

    ()

    (Yale University)

Analyzing comovements in equity markets is important for risk diversification in portfolio management. Copulas have several advantages compared to the linear correlation measure in modeling comovement. This paper introduces a copula ARMA-GARCH model for analyzing the comovement of indexes in German equity markets. The model is implemented with an ARMA-GARCH model for the marginal distributions and a copula for the joint distribution. After goodness-of-fit testing, we find that the skewed Student's t copula ARMA(1,1)-GARCH(1,1) model with Lévy fractional stable noise is superior to alternative models investigated in our study where we model the simultaneous comovement of six German equity market indexes. This model is also suitable for capturing the long-range dependence, tail dependence, and asymmetric correlation observed in German equity markets.

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File URL: https://www.degruyter.com/view/j/snde.2008.12.2/snde.2008.12.2.1572/snde.2008.12.2.1572.xml?format=INT
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Article provided by De Gruyter in its journal Studies in Nonlinear Dynamics & Econometrics.

Volume (Year): 12 (2008)
Issue (Month): 2 (May)
Pages: 1-37

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Handle: RePEc:bpj:sndecm:v:12:y:2008:i:2:n:3
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  1. Muller, Ulrich A. & Dacorogna, Michel M. & Olsen, Richard B. & Pictet, Olivier V. & Schwarz, Matthias & Morgenegg, Claude, 1990. "Statistical study of foreign exchange rates, empirical evidence of a price change scaling law, and intraday analysis," Journal of Banking & Finance, Elsevier, vol. 14(6), pages 1189-1208, December.
  2. Ang, Andrew & Chen, Joseph, 2002. "Asymmetric correlations of equity portfolios," Journal of Financial Economics, Elsevier, vol. 63(3), pages 443-494, March.
  3. Robert F. Engle & Jeffrey R. Russell, 1998. "Autoregressive Conditional Duration: A New Model for Irregularly Spaced Transaction Data," Econometrica, Econometric Society, vol. 66(5), pages 1127-1162, September.
  4. Sun, Wei & Rachev, Svetlozar & Fabozzi, Frank J., 2007. "Fractals or I.I.D.: Evidence of long-range dependence and heavy tailedness from modeling German equity market returns," Journal of Economics and Business, Elsevier, vol. 59(6), pages 575-595.
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