IDEAS home Printed from https://ideas.repec.org/p/rye/wpaper/wp046.html
   My bibliography  Save this paper

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, Ryerson University, Department of Economics.
    • Handle: RePEc:rye:wpaper:wp046
    as

    Download full text from publisher

    File URL: https://www.arts.ryerson.ca/economics/repec/pdfs/wp046.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. repec:oup:rfinst:v:25:y::i:12:p:3711-3751 is not listed on IDEAS
    2. Andrew Ang & Geert Bekaert, 2002. "International Asset Allocation With Regime Shifts," Review of Financial Studies, Society for Financial Studies, vol. 15(4), pages 1137-1187.
    3. Jón Daníelsson & Jean-Pierre Zigrand, 2008. "Equilibrium asset pricing with systemic risk," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 35(2), pages 293-319, May.
    4. Brumelle, Shelby L., 1974. "When Does Diversification between Two Investments Pay?," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 9(3), pages 473-483, June.
    5. Lorenzo Cappiello & Robert F. Engle & Kevin Sheppard, 2006. "Asymmetric Dynamics in the Correlations of Global Equity and Bond Returns," Journal of Financial Econometrics, Oxford University Press, vol. 4(4), pages 537-572.
    6. Tim Bollerslev & Viktor Todorov, 2011. "Tails, Fears, and Risk Premia," Journal of Finance, American Finance Association, vol. 66(6), pages 2165-2211, December.
    7. Lorán Chollete & Andréas Heinen & Alfonso Valdesogo, 2009. "Modeling International Financial Returns with a Multivariate Regime-switching Copula," The Journal of Financial Econometrics, Society for Financial Econometrics, vol. 7(4), pages 437-480, Fall.
    8. Campbell, John Y, 1996. "Understanding Risk and Return," Journal of Political Economy, University of Chicago Press, vol. 104(2), pages 298-345, April.
    9. Peter Christoffersen & Vihang Errunza & Kris Jacobs & Hugues Langlois, 2012. "Is the Potential for International Diversification Disappearing? A Dynamic Copula Approach," Review of Financial Studies, Society for Financial Studies, vol. 25(12), pages 3711-3751.
    10. Chen, Xiaohong & Fan, Yanqin, 2006. "Estimation and model selection of semiparametric copula-based multivariate dynamic models under copula misspecification," Journal of Econometrics, Elsevier, vol. 135(1-2), pages 125-154.
    11. Chollete, Lorán & de la Peña, Victor & Lu, Ching-Chih, 2011. "International diversification: A copula approach," Journal of Banking & Finance, Elsevier, vol. 35(2), pages 403-417, February.
    12. Ang, Andrew & Chen, Joseph, 2002. "Asymmetric correlations of equity portfolios," Journal of Financial Economics, Elsevier, vol. 63(3), pages 443-494, March.
    13. Nicholas Barberis & Ming Huang & Tano Santos, 2001. "Prospect Theory and Asset Prices," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 116(1), pages 1-53.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Chollete, Loran & Ning, Cathy, 2010. "Asymmetric Dependence in US Financial Risk Factors?," UiS Working Papers in Economics and Finance 2011/2, University of Stavanger.
    2. Chollete, Loran & Ning, Cathy, 2009. "The Dependence Structure of Macroeconomic Variables in the US," UiS Working Papers in Economics and Finance 2009/31, University of Stavanger.
    3. Chollete, Lorán & de la Peña, Victor & Lu, Ching-Chih, 2011. "International diversification: A copula approach," Journal of Banking & Finance, Elsevier, vol. 35(2), pages 403-417, February.
    4. Chollete, Loran & Pena, Victor de la & Lu, Ching-Chih, 2009. "International Diversification: A Copula Approach," UiS Working Papers in Economics and Finance 2009/27, University of Stavanger.
    5. Chollete, Lorán & de la Peña, Victor & Lu, Ching-Chih, 2012. "International diversification: An extreme value approach," Journal of Banking & Finance, Elsevier, vol. 36(3), pages 871-885.
    6. Chollete, Loran & de la Pena , Victor & Lu, Ching-Chih, 2009. "International Diversification: An Extreme Value Approach," UiS Working Papers in Economics and Finance 2009/26, University of Stavanger.
    7. Gilles Boevi Koumou, 2020. "Diversification and portfolio theory: a review," Financial Markets and Portfolio Management, Springer;Swiss Society for Financial Market Research, vol. 34(3), pages 267-312, September.
    8. Reboredo, Juan C., 2012. "Do food and oil prices co-move?," Energy Policy, Elsevier, vol. 49(C), pages 456-467.
    9. Cerrato, Mario & Crosby, John & Kim, Minjoo & Zhao, Yang, 2015. "US Monetary and Fiscal Policies - Conflict or Cooperation?," SIRE Discussion Papers 2015-78, Scottish Institute for Research in Economics (SIRE).
    10. Cerrato, Mario & Crosby, John & Kim, Minjoo & Zhao, Yang, 2015. "US Monetary and Fiscal Policies - Conflict or Cooperation?," 2007 Annual Meeting, July 29-August 1, 2007, Portland, Oregon TN 2015-78, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    11. Chollete, Loran & Ning, Cathy, 2012. "Asymmetric Dependence in the US Economy: Application to Money and the Phillips Curve," UiS Working Papers in Economics and Finance 2012/1, University of Stavanger.
    12. Mario Cerrato & John Crosby & Minjoo Kim & Yang Zhao, 2015. "Modeling Dependence Structure and Forecasting Market Risk with Dynamic Asymmetric Copula," Working Papers 2015_15, Business School - Economics, University of Glasgow.
    13. Huang, Huichou & MacDonald, Ronald & Zhao, Yang, 2012. "Global Currency Misalignments, Crash Sensitivity, and Downside Insurance Costs," MPRA Paper 53745, University Library of Munich, Germany, revised 18 Nov 2013.
    14. Małgorzata Doman & Ryszard Doman, 2013. "Dynamic linkages between stock markets: the effects of crises and globalization," Portuguese Economic Journal, Springer;Instituto Superior de Economia e Gestao, vol. 12(2), pages 87-112, August.
    15. Dimic, Nebojsa & Piljak, Vanja & Swinkels, Laurens & Vulanovic, Milos, 2021. "The structure and degree of dependence in government bond markets," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 74(C).
    16. Niţoi, Mihai & Pochea, Maria Miruna, 2020. "Time-varying dependence in European equity markets: A contagion and investor sentiment driven analysis," Economic Modelling, Elsevier, vol. 86(C), pages 133-147.
    17. Andersen, Torben G. & Bollerslev, Tim & Christoffersen, Peter F. & Diebold, Francis X., 2013. "Financial Risk Measurement for Financial Risk Management," Handbook of the Economics of Finance, in: G.M. Constantinides & M. Harris & R. M. Stulz (ed.), Handbook of the Economics of Finance, volume 2, chapter 0, pages 1127-1220, Elsevier.
    18. Chollete, Loran & Ismailescu, Iuliana & Lu, Ching-Chih, 2014. "Dependence between Extreme Events in the Real and Financial Sectors," UiS Working Papers in Economics and Finance 2014/12, University of Stavanger.
    19. Chang, Kuang-Liang, 2023. "The low-magnitude and high-magnitude asymmetries in tail dependence structures in international equity markets and the role of bilateral exchange rate," Journal of International Money and Finance, Elsevier, vol. 133(C).

    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

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:rye:wpaper:wp046. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Doosoo Kim (email available below). General contact details of provider: https://edirc.repec.org/data/deryeca.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.