Time Variation in Asset Return Dependence: Strength or Structure?
The dependence between asset returns varies. Its strength can become stronger or weaker. Also, its structure can change, for example, when asymmetries related to bull and bear markets become more or less pronounced. To analyze these different types of variations, we develop a model that separately accommodates these changes. It combines a mixture of structurally different copulas with time variation. Our model shows both types of changes in the dependence between several equity market returns. Ignoring them leads to biases in risk measures. An underestimation of Value-at-Risk by maximum 15% occurs exactly when most harmful, during crisis periods.
|copulas, dependence, international correlations, stock markets|
|Time-Series Models; Dynamic Quantile Regressions (jel C32), International Finance (jel F3), International Financial Markets (jel G15)|
|Erasmus Research Institute of Management|
|ERIM Report Series Research in Management|
|ERIM report series research in management Erasmus Research Institute of Management|
|Organisation||Erasmus Research Institute of Management|
Markwat, T.D, Kole, H.J.W.G, & van Dijk, D.J.C. (2009). Time Variation in Asset Return Dependence: Strength or Structure? (No. ERS-2009-052-F&A). ERIM report series research in management Erasmus Research Institute of Management. Erasmus Research Institute of Management. Retrieved from http://hdl.handle.net/1765/17096