Time Variation in Asset Return Dependence: Strength or Structure?

64 Pages Posted: 25 Aug 2009 Last revised: 25 Nov 2013

See all articles by Thijs D. Markwat

Thijs D. Markwat

Robeco Asset Management

Erik Kole

Erasmus University Rotterdam - Erasmus School of Economics - Econometric Institute; ERIM; Tinbergen Institute

Dick J. C. van Dijk

Erasmus University Rotterdam - Erasmus School of Economics - Econometric Institute; ERIM

Date Written: June 12, 2012

Abstract

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 di erent types of variations, we develop a model that separately accommodates these changes. It combines a mixture of structurally di erent 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.

Keywords: Dependence, Stock markets, Copulas, International correlations

JEL Classification: C32, F3, G15

Suggested Citation

Markwat, Thijs Dingeman and Kole, Erik and van Dijk, Dick J.C., Time Variation in Asset Return Dependence: Strength or Structure? (June 12, 2012). 22nd Australasian Finance and Banking Conference 2009; ERIM Report Series Reference No. ERS-2009-052-F&A. Available at SSRN: https://ssrn.com/abstract=1460648 or http://dx.doi.org/10.2139/ssrn.1460648

Thijs Dingeman Markwat (Contact Author)

Robeco Asset Management ( email )

Weena 850
3014 DA
Rotterdam
Netherlands

Erik Kole

Erasmus University Rotterdam - Erasmus School of Economics - Econometric Institute ( email )

P.O. Box 1738
3000 DR Rotterdam
Netherlands
+31 10 408 12 58 (Phone)

HOME PAGE: http://people.few.eur.nl/kole

ERIM

P.O. Box 1738
3000 DR Rotterdam
Netherlands

Tinbergen Institute ( email )

Burg. Oudlaan 50
Rotterdam, 3062 PA
Netherlands

HOME PAGE: http://people.few.eur.nl/kole

Dick J.C. Van Dijk

Erasmus University Rotterdam - Erasmus School of Economics - Econometric Institute

P.O. Box 1738
3000 DR Rotterdam
Netherlands

ERIM ( email )

P.O. Box 1738
3000 DR Rotterdam
Netherlands
+31 10 408 1263 (Phone)
+31 10 4089162 (Fax)

HOME PAGE: http://people.few.eur.nl/djvandijk

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