Tail-Dependence in Stock-Return Pairs
The empirical joint distribution of return-pairs on stock indices displays high tail-dependence in the lower tail and low tail-dependence in the upper tail. The presence of tail-dependence is not compatible with the assumption of (conditional) joint normality. The presence of asymmetric-tail dependence is not compatible with the assumption of a joint student-t distribution. A general test for one dependence structure versus another via the profile-likelihood is described and employed in a bivariate GARCH model, where the joint distribution of the disturbances is split into its marginals and its copula. The copula used is such that it allows for the presence of lower tail-dependence and for asymmetric tail-dependence, and that it encompasses the normal or t-copula. The model is estimated using bivariate data on a set of European stock indices. We find that the assumption of normal or student-t dependence is easily rejected in favour of an asymmetrically tail-dependent distribution.
|Date of creation:||Nov 2002|
|Date of revision:|
|Contact details of provider:|| Postal: |
Phone: ++43 - (0)1 - 599 91 - 0
Fax: ++43 - (0)1 - 599 91 - 555
Web page: http://www.ihs.ac.at
More information through EDIRC
|Order Information:|| Postal: Institute for Advanced Studies - Library, Stumpergasse 56, A-1060 Vienna, Austria|
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- A. Sancetta & Satchell, S.E., 2001. "Bernstein Approximations to the Copula Function and Portfolio Optimization," Cambridge Working Papers in Economics 0105, Faculty of Economics, University of Cambridge.
- Robert F. Engle & Simone Manganelli, 2004.
"CAViaR: Conditional Autoregressive Value at Risk by Regression Quantiles,"
Journal of Business & Economic Statistics,
American Statistical Association, vol. 22, pages 367-381, October.
- Robert Engle & Simone Manganelli, 2000. "CAViaR: Conditional Autoregressive Value at Risk by Regression Quantiles," Econometric Society World Congress 2000 Contributed Papers 0841, Econometric Society.
- Engle, Robert F & Manganelli, Simone, 1999. "CAViaR: Conditional Autoregressive Value at Risk by Regression Quantiles," University of California at San Diego, Economics Working Paper Series qt06m3d6nv, Department of Economics, UC San Diego.
- Tim Bollerslev, 1986.
"Generalized autoregressive conditional heteroskedasticity,"
EERI Research Paper Series
EERI RP 1986/01, Economics and Econometrics Research Institute (EERI), Brussels.
- Bollerslev, Tim, 1986. "Generalized autoregressive conditional heteroskedasticity," Journal of Econometrics, Elsevier, vol. 31(3), pages 307-327, April.
- Mico Loretan & William B. English, 2000. "Evaluating "correlation breakdowns" during periods of market volatility," International Finance Discussion Papers 658, Board of Governors of the Federal Reserve System (U.S.).
- ROCKINGER, Michael & JONDEAU, Eric, 2001.
"Conditional dependency of financial series : an application of copulas,"
Les Cahiers de Recherche
723, HEC Paris.
- Rockinger, M. & Jondeau, E., 2001. "Conditional Dependency of Financial Series: An Application of Copulas," Working papers 82, Banque de France.
- Angelos Kanas, 1998. "Volatility spillovers across equity markets: European evidence," Applied Financial Economics, Taylor & Francis Journals, vol. 8(3), pages 245-256.
- McNeil, Alexander J. & Frey, Rudiger, 2000. "Estimation of tail-related risk measures for heteroscedastic financial time series: an extreme value approach," Journal of Empirical Finance, Elsevier, vol. 7(3-4), pages 271-300, November.
- Bollerslev, Tim, 1987. "A Conditionally Heteroskedastic Time Series Model for Speculative Prices and Rates of Return," The Review of Economics and Statistics, MIT Press, vol. 69(3), pages 542-47, August.
- Patton, Andrew J, 2001. "Modelling Time-Varying Exchange Rate Dependence Using the Conditional Copula," University of California at San Diego, Economics Working Paper Series qt01q7j1s2, Department of Economics, UC San Diego.
- Longin, Francois & Solnik, Bruno, 1995. "Is the correlation in international equity returns constant: 1960-1990?," Journal of International Money and Finance, Elsevier, vol. 14(1), pages 3-26, February.
- Bollerslev, Tim, 1990. "Modelling the Coherence in Short-run Nominal Exchange Rates: A Multivariate Generalized ARCH Model," The Review of Economics and Statistics, MIT Press, vol. 72(3), pages 498-505, August.
- François Longin, 2001. "Extreme Correlation of International Equity Markets," Journal of Finance, American Finance Association, vol. 56(2), pages 649-676, 04.
When requesting a correction, please mention this item's handle: RePEc:ihs:ihsesp:126. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Doris Szoncsitz)
If references are entirely missing, you can add them using this form.