Revisiting the Dependence between Financial Markets with Copulas
45 Pages Posted: 26 Nov 2007 Last revised: 3 Apr 2009
Date Written: October 24, 2000
We consider the problem of modelling the dependence between financial markets. In financial economics, the classical tool is the Pearson (or linear correlation) coefficient to compare the dependence structure. We show that this coefficient does not give a precise information on the dependence structure. Instead, we propose a conceptual framework based on copulas. Two applications are proposed. The first one concerns the study of extreme dependence between international equity markets. The second one concerns the analysis of the East Asian crisis.
Keywords: Linear correlation, extreme value theory, quantile regression, concordance order, Deheuvels copula, contagion, Asian crisis
JEL Classification: G00
Suggested Citation: Suggested Citation