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Dependence Structure and Extreme Comovements in International Equity and Bond Markets

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  • René Garcia
  • Georges Tsafack

Abstract

Common negative extreme variations in returns are prevalent in international equity markets. This has been widely documented with statistical tools such as exceedance correlation, extreme value theory, and Gaussian bivariate GARCH or regime-switching models. We point to limits of these tools to characterize extreme dependence and propose an alternative regime-switching copula model that includes one normal regime in which dependence is symmetric and a second regime characterized by asymmetric dependence. We apply this model to international equity and bond markets, to allow for inter-market movements. Empirically, we find that dependence between international assets of the same type is strong in both regimes, especially in the asymmetric one, but weak between equities and bonds, even in the same country.
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Suggested Citation

  • René Garcia & Georges Tsafack, 2009. "Dependence Structure and Extreme Comovements in International Equity and Bond Markets," CIRANO Working Papers 2009s-21, CIRANO.
    • Handle: RePEc:cir:cirwor:2009s-21
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    More about this item

    Keywords

    asymmetric correlation; asymmetric dependence; copula; tail dependence; GARCH; regime switching; home bias; flight to safety; corrélation asymétrique; dépendance asymétrique; copules; dépendance dans les queues; GARCH; changement de régime; surinvestissement dans des sociétés proches du domicile; fuite vers la sécurité;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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