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Test of the Gaussian Copula on the Swedish Stock Market

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Abstract

This paper examines whether the pairwise comovement between stocks quoted on the Stockholm stock exchange can be correctly quantified by the Gaussian copula, i.e., by linear correlation. Two different methods are used to test whether the dependence on the Swedish stock market can be modeled by the Gaussian copula. From these tests, we come to the conclusion that the Gaussian copula is not an appropriate choice of copula for the Swedish stock market. We also come to the same conclusion when observing sector and industry indices on the Swedish stock market. However, if performing a GARCH filtering of the return series, there is a substantial decrease in the number of pairs of either stocks or indices for which the Gaussian copula can be rejected. For the two test methods, a notable difference in the rejection rate of the Gaussian copula can also be observed.

Suggested Citation

  • Söderberg, Jonas, 2008. "Test of the Gaussian Copula on the Swedish Stock Market," CAFO Working Papers 2009:9, Linnaeus University, Centre for Labour Market Policy Research (CAFO), School of Business and Economics.
  • Handle: RePEc:hhs:vxcafo:2009_009
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    File URL: http://www.vxu.se/ehv/filer/forskning/cafo/wps/Nek_wp9_09.pdf
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    References listed on IDEAS

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    1. Brännäs, Kurt & Quoreshi, Shahiduzzaman & Simonsen, Ola, 2002. "Extreme-Value Characteristics in Daily Time Series of Swedish Stock Returns," Umeå Economic Studies 597, Umeå University, Department of Economics.
    2. François Longin, 2001. "Extreme Correlation of International Equity Markets," Journal of Finance, American Finance Association, vol. 56(2), pages 649-676, April.
    3. Robert Engle, 2001. "GARCH 101: The Use of ARCH/GARCH Models in Applied Econometrics," Journal of Economic Perspectives, American Economic Association, vol. 15(4), pages 157-168, Fall.
    4. Ser-Huang Poon, 2004. "Extreme Value Dependence in Financial Markets: Diagnostics, Models, and Financial Implications," Review of Financial Studies, Society for Financial Studies, vol. 17(2), pages 581-610.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Risk management; Gaussian copula; Swedish stock markets; GARCH filtering;

    JEL classification:

    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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