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Power Attrition of Asymmetric Tail Comovement Test

Author

Listed:
  • Kaihua Deng

    (University of Washington)

Abstract

In the Markov-switching framework, I study the effects of nuisance parameters such as the correlation and transition probability on the power of a recently proposed nonparametric test of asymmetric tail comovement (Li, 2014). As nuisance parameters govern how different states are separated apart and how they interact with each other, it is found that substantial power loss can be incurred when the underlying parameters take certain values. In addition, I show that the power of the test is sensitive to the choice of tail threshold and is adversely affected as one goes into deeper tails.

Suggested Citation

  • Kaihua Deng, 2015. "Power Attrition of Asymmetric Tail Comovement Test," Economics Bulletin, AccessEcon, vol. 35(4), pages 2813-2819.
    • Handle: RePEc:ebl:ecbull:eb-15-00494
    as

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    References listed on IDEAS

    as
    1. Andrew Ang & Geert Bekaert, 2002. "International Asset Allocation With Regime Shifts," Review of Financial Studies, Society for Financial Studies, vol. 15(4), pages 1137-1187.
    2. Timmermann, Allan, 2000. "Moments of Markov switching models," Journal of Econometrics, Elsevier, vol. 96(1), pages 75-111, May.
    3. Ang, Andrew & Chen, Joseph, 2002. "Asymmetric correlations of equity portfolios," Journal of Financial Economics, Elsevier, vol. 63(3), pages 443-494, March.
    4. Andrews, Donald W K, 1991. "Heteroskedasticity and Autocorrelation Consistent Covariance Matrix Estimation," Econometrica, Econometric Society, vol. 59(3), pages 817-858, May.
    5. Fuchun Li, 2014. "Identifying Asymmetric Comovements of International Stock Market Returns," Journal of Financial Econometrics, Oxford University Press, vol. 12(3), pages 507-543.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Asymmetric tail comovement; Markov-switching; Nuisance parameters; Power attrition;
    All these keywords.

    JEL classification:

    • C1 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General
    • C4 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics

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