A COAALA Copula for Stock-Bond Return Co-Movement: Beware of the Beast With Four Tails
36 Pages Posted: 20 May 2019
Date Written: May 7, 2019
The paper analyses the co-movement between stocks and government bonds using information on both global and local dependence. This is achieved using a novel copula function which accommodates the known features of stock-bond dependence (i.e. alternating sign of dependence) and, additionally, allows to detect asymmetries in the occurrence of all four joint extreme events. This functional form comes with closed-form expressions for the dependence measures without the computational deficiencies of alternative models such as the skewed Student-t copula. Our model confirms previous findings showing that the global associations in various stock-bond markets are similar. However, it unveils important differences in the asymptotic tail dependence of these markets and detects evidences of asymmetric tails, which have never been reported yet. Moreover, we show that taking into account the potential diversification effect in the asymmetric tails can have a substantial impact on portfolio risk measurement.
Keywords: copula, asymmetries, tail dependence, stock-bond co-movement
JEL Classification: C58, G11, G12
Suggested Citation: Suggested Citation