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Dependence of Stock Returns in Bull and Bear Markets

Author

Listed:
  • Dobric Jadran

    (Credit Risk Control, WGZ BANK AG, Düsseldorf, Germany)

  • Frahm Gabriel

    (Chair for Applied Stochastics and Risk Management, Helmut Schmidt University, Hamburg, Germany)

  • Schmid Friedrich

    (University of Cologne, Germany)

Abstract

Despite of its many shortcomings, Pearson’s rho is often used as an association measure for stock returns. A conditional version of Spearman’s rho is suggested as an alternative measure of association. This approach is purely nonparametric and avoids any kind of model misspecification. We derive hypothesis tests for the conditional rank-correlation coefficients particularly arising in bull and bear markets and study their finite-sample performance by Monte Carlo simulation. Further, the daily returns on stocks contained in the German stock index DAX 30 are analyzed. The empirical study reveals significant differences in the dependence of stock returns in bull and bear markets.

Suggested Citation

  • Dobric Jadran & Frahm Gabriel & Schmid Friedrich, 2013. "Dependence of Stock Returns in Bull and Bear Markets," Dependence Modeling, De Gruyter, vol. 1(2013), pages 94-110, December.
    • Handle: RePEc:vrs:demode:v:1:y:2013:i::p:94-110:n:5
    DOI: 10.2478/demo-2013-0005
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    References listed on IDEAS

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    Cited by:

    1. Fabrizio Durante & Enrico Foscolo & Alex Weissensteiner, 2017. "Dependence between Stock Returns of Italian Banks and the Sovereign Risk," Econometrics, MDPI, vol. 5(2), pages 1-14, June.

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