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Spurious Dependence

Author

Listed:
  • Chollete, Loran

    (UiS)

  • Pena, Victor de la

    (Columbia University)

  • Segers , Johan

    (Universite Catholique de Louvain)

Abstract

We study the problem of potentially spurious attribution of dependence in moderate to large samples, where both the number of variables and length of variable observations are growing. We approach this question of double asymptotics from both theoretical and empirical perspectives. For theoretical characterization, we consider a combination of poissonization and large deviation techniques. For empirics, we simulate a large dataset of i.i.d. variables and estimate dependence as both sample size and the number of iterations grow. We represent the different effects of sample size versus length of variables, via an empirical dependence surface. Finally, we apply the empirical method to a panel of financial data, comprising daily stock returns for 60 companies. For both simulated and financial data, increasing sample size reduces dependence estimates after a certain point. However, increasing the number of variables does not appear to attenuate the potential for spurious dependence, as measured by maximal Kendall's tau.

Suggested Citation

  • Chollete, Loran & Pena, Victor de la & Segers , Johan, 2014. "Spurious Dependence," UiS Working Papers in Economics and Finance 2014/10, University of Stavanger.
    • Handle: RePEc:hhs:stavef:2014_010
    as

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    References listed on IDEAS

    as
    1. Ser-Huang Poon, 2004. "Extreme Value Dependence in Financial Markets: Diagnostics, Models, and Financial Implications," The Review of Financial Studies, Society for Financial Studies, vol. 17(2), pages 581-610.
    2. François Longin & Bruno Solnik, 2001. "Extreme Correlation of International Equity Markets," Journal of Finance, American Finance Association, vol. 56(2), pages 649-676, April.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Double Asymptotics; Empirical Dependence Surface; Financial Data; Poissonization; Simulation; Spurious Dependence;
    All these keywords.

    JEL classification:

    • A10 - General Economics and Teaching - - General Economics - - - General

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