COAALA: A novel approach to understanding extreme stock-bond comovement
33 Pages Posted: 20 May 2019 Last revised: 27 Apr 2022
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: Suggested Citation