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Frequent Turbulence? A Dynamic Copula Approach

  • Chollete, Lorán

    ()

    (Dept. of Finance and Management Science, Norwegian School of Economics and Business Administration)

  • Heinen, Andreas

    ()

    (Dept. of Statistics and Econometrics, Universidad Carlos III de Madrid)

How common and how persistent are turbulent periods? We address these questions by developing and applying a dynamic dependence framework. In order to answer the first question we estimate an unconditional mixture model of normal copulas, based on both economic and econometric justification. In order to answer the second question, we develop and estimate a hidden markov model of copulas, which allows for dynamic clustering of correlations. These models permit one to infer the relative importance of turbulent and quiescent periods in international markets. Empirically, the three most striking findings are as follows. First, for the unconditional model, turbulent regimes are more common. Second, the conditional copula model dominates the unconditional model. Third, turbulent regimes tend to be more persistent.

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File URL: http://hdl.handle.net/11250/163892
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Paper provided by Department of Business and Management Science, Norwegian School of Economics in its series Discussion Papers with number 2006/10.

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Length: 43 pages
Date of creation: 11 Oct 2006
Date of revision:
Handle: RePEc:hhs:nhhfms:2006_010
Contact details of provider: Postal: NHH, Department of Business and Management Science, Helleveien 30, N-5045 Bergen, Norway
Phone: +47 55 95 92 93
Fax: +47 55 95 96 50
Web page: http://www.nhh.no/en/research-faculty/department-of-business-and-management-science.aspx
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  1. Rodriguez, Juan Carlos, 2007. "Measuring financial contagion: A Copula approach," Journal of Empirical Finance, Elsevier, vol. 14(3), pages 401-423, June.
  2. Ang, Andrew & Chen, Joseph, 2002. "Asymmetric correlations of equity portfolios," Journal of Financial Economics, Elsevier, vol. 63(3), pages 443-494, March.
  3. Andrew J. Patton, 2002. "On the out-of-sample importance of skewness and asymetric dependence for asset allocation," LSE Research Online Documents on Economics 24951, London School of Economics and Political Science, LSE Library.
  4. G. William Schwert, 2001. "Stock Volatility in the New Millennium: How Wacky Is Nasdaq?," NBER Working Papers 8436, National Bureau of Economic Research, Inc.
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