A New Time-Varying Asymmetric Copula Analysis of the EU Sovereign Debt Crisis
28 Pages Posted: 7 Mar 2019
Date Written: February 21, 2019
This paper considers the time-varying asymmetric correlation between the stock and government bond price returns of the five peripheral EU countries during the EU sovereign crisis. To this end this paper proposes a new asymmetric copula using the split-normal distribution. The time-varying correlation coefficients are estimated by the particle filter method in the state-space framework.
It finds a strong asymmetry in the early stage of the crisis, namely positive lower-tail correlation and negative upper-tail correlation of the stock-bond distribution, which the other copulas cannot express. It also finds that the signs of the correlations changed from negative to positive in the crisis.
Keywords: Copula, Particle Filter, Split-Normal Distribution, State Space Model
JEL Classification: C22,C32, G01
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