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Conditional dependency of financial series : an application of copulas

  • ROCKINGER, Michael
  • JONDEAU, Eric

    (Banque de France, DEER)

We develop a new methodology that measures conditional dependency. We achieve this by using copula functions that link marginal distributions, here chosen to obey a GARCH-type model with time-varying skewness and kurtosis. We apply this model to daily returns of stock-market indices. We find strong evidence of persistence in dependency both for local currency and $ US denominated series. For European stock markets, we also find evidence that large simultaneous returns of either sign lead to higher subsequent dependency. We show that dependency changes through time, as well. For stock markets within Europe, dependency increased whereas it decreased since the mid 90s when involving the S&P 500 or the Nikkei. We also suggest extensions for conditional asset pricing models involving time variation of co-skewness and co-kurtosis.

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Paper provided by HEC Paris in its series Les Cahiers de Recherche with number 723.

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Length: 43 pages
Date of creation: 01 Feb 2001
Date of revision:
Handle: RePEc:ebg:heccah:0723
Contact details of provider: Postal: HEC Paris, 78351 Jouy-en-Josas cedex, France
Web page: http://www.hec.fr/

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  9. Rockinger, Michael & Urga, Giovanni, 2001. "A Time-Varying Parameter Model to Test for Predictability and Integration in the Stock Markets of Transition Economies," Journal of Business & Economic Statistics, American Statistical Association, vol. 19(1), pages 73-84, January.
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  29. Gourieroux, Christian & Monfort, Alain, 1992. "Qualitative threshold ARCH models," Journal of Econometrics, Elsevier, vol. 52(1-2), pages 159-199.
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