Nonlinear Bivariate Comovements of Asset Prices: Theory and Tests

26 Pages Posted: 19 Oct 2007  

A. (Tassos) G. Malliaris

Loyola University of Chicago - Department of Economics

Marco Corazza

Ca Foscari University of Venice - Dipartimento di Economia

Elisa Scalco

Independent

Date Written: August 2006

Abstract

Comovements among asset prices have received a lot of attention for several reasons. For example, comovements are important in cross-hedging and cross-speculation; they determine capital allocation both domestically and in international mean-variance portfolios and also, they are useful in investigating the extent of integration among financial markets. In this paper we propose a new methodology for the non-linear modelling of bivariate comovements. Our approach extends the ones presented in the recent literature. In fact, our methodology outlined in three steps, allows the evaluation and the statistical testing of non-linearly driven comovements between two given random variables. Moreover, when such a bivariate dependence relationship is detected, our approach solves for a polynomial approximation. We illustrate our three-steps methodology to the time series of energy related asset prices. Finally, we exploit this dependence relationship and its polynomial approximation to obtain analytical approximations of the Greeks for the European call and put options in terms of an asset whose price comoves with the price of the underlying asset.

Keywords: Comovement, asset prices, bivariate dependence, non-linearity, t-test, polynomial approximation, energy asset, (vanilla) European call and put options, cross-Greeks

JEL Classification: C59, G19, Q49

Suggested Citation

Malliaris, A. (Tassos) G. and Corazza, Marco and Scalco, Elisa, Nonlinear Bivariate Comovements of Asset Prices: Theory and Tests (August 2006). Available at SSRN: https://ssrn.com/abstract=1021802 or http://dx.doi.org/10.2139/ssrn.1021802

A. (Tassos) G. Malliaris (Contact Author)

Loyola University of Chicago - Department of Economics ( email )

16 E. Pearson Ave
Quinlan School of Business
Chicago, IL 60611
United States
312-915-6063 (Phone)

Marco Corazza

Ca Foscari University of Venice - Dipartimento di Economia ( email )

Cannaregio 873
Venice, 30121
Italy

Elisa Scalco

Independent

No Address Available

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