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Asymmetric Dependence between Aggregate Consumption and Financial Risk

Author

Listed:
  • Cathy Ning

    (Department of Economics, Ryerson University, Toronto, Canada)

  • Loran Chollete

    (University of Stavanger, Stavanger, NO)

Abstract

When aggregate consumption and risk factors exhibit asymmetric dependence, diversification becomes complicated and markets may face spillover risk between the real and financial sector. Moreover, empirical analyses based on second moments will not detect the true risk structure. We analyze dependence of US aggregate consumption and risk factors, using copulas. Interestingly for research on spillovers, we find evidence of downside dependence between consumption and industry risk, and between consumption and market and size factors. We discover significant dynamics in dependence between consumption and the size factor. Thus, consumption and financial risk may exhibit time variation in downside risk. Our results provide quantitative evidence on susceptibility of financial markets to diversification problems, and on spillover risk between real and financial sectors.

Suggested Citation

  • Cathy Ning & Loran Chollete, 2012. "Asymmetric Dependence between Aggregate Consumption and Financial Risk," Working Papers 046, Toronto Metropolitan University, Department of Economics.
    • Handle: RePEc:rye:wpaper:wp046
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    References listed on IDEAS

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    More about this item

    Keywords

    Asymmetric Dependence; Aggregate Consumption; Diversification; Spillover Risk; Time-Varying Downside Risk;
    All these keywords.

    JEL classification:

    • C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G01 - Financial Economics - - General - - - Financial Crises
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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