A Test of General Asymmetric Dependence
Journal of Applied Econometrics, 2018, 33, 1026-1043.
34 Pages Posted: 11 May 2018 Last revised: 16 Nov 2023
Date Written: April 24, 2018
Abstract
We propose a modified mutual information measure to capture general asymmetric dependence between two random variables. Based on this measure, we propose a test of asymmetric dependence and examine its finite-sample performance. We show that our test has better power than competing tests with alternative dependence measures. Using the new test, we find significant asymmetric dependence in returns of commonly-used stock portfolios and the market return both in the U.S and other developed countries. Further, the dependence between developed country markets and the U.S. market is stronger when both markets are in a downturn.
Keywords: Asymmetric Dependence, Kullback-Leibler Relative Entropy, Exceedance Mutual Information
JEL Classification: C12, C15, C32, G12
Suggested Citation: Suggested Citation