COAALA: A novel approach to understanding extreme stock-bond comovement

33 Pages Posted: 20 May 2019 Last revised: 27 Apr 2022

See all articles by Anne-Florence Allard

Anne-Florence Allard

University of Bristol

Hamza Hanbali

KU Leuven - Faculty of Business and Economics (FEB)

Kristien Smedts

KU Leuven - Faculty of Economics and Business (FEB)

Date Written: April 13, 2022

Abstract

This paper proposes a novel copula model designed to unravel the dependence between extreme variations in stocks and government bonds. This model is used to test whether government bonds can dampen extreme stock market turbulence, in which case the government bond market is referred to in this paper as tail risk dampener. Our findings reveal significant cross-country differences in stock-bond extreme tail dependence, indicating that not all government bonds act as tail risk dampeners. This is in contrast with similar global dependence dynamics across countries and highlights the necessity to consider both the global dependence and the tail dependence when analyzing the comovement between assets.

Keywords: stock-bond dependence, tail dependence, time-varying copulas

JEL Classification: C58, G11, G12

Suggested Citation

Allard, Anne-Florence and Hanbali, Hamza and Smedts, Kristien, COAALA: A novel approach to understanding extreme stock-bond comovement (April 13, 2022). Available at SSRN: https://ssrn.com/abstract=3384096 or http://dx.doi.org/10.2139/ssrn.3384096

Anne-Florence Allard (Contact Author)

University of Bristol ( email )

36 Tyndall's Park Road
Bristol, Avon BS8 1TB
United Kingdom

HOME PAGE: http://https://research-information.bris.ac.uk/en/persons/anne-florence-allard

Hamza Hanbali

KU Leuven - Faculty of Business and Economics (FEB) ( email )

Naamsestraat 69
Leuven, B-3000
Belgium

Kristien Smedts

KU Leuven - Faculty of Economics and Business (FEB) ( email )

Naamsestraat 69
Leuven, B-3000
Belgium

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