Time Variation in Asset Return Dependence: Strength or Structure?
64 Pages Posted: 25 Aug 2009 Last revised: 25 Nov 2013
Date Written: June 12, 2012
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: Suggested Citation