A COAALA Copula for Stock-Bond Return Co-Movement: Beware of the Beast With Four Tails

36 Pages Posted: 20 May 2019

See all articles by Anne-Florence Allard

Anne-Florence Allard

KU Leuven - Department of Accountancy, Finance and Insurance (AFI)

Hamza Hanbali

KU Leuven - Faculty of Business and Economics (FEB)

Kristien Smedts

KU Leuven - Faculty of Economics and Business (FEB)

Date Written: May 7, 2019

Abstract

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

Allard, Anne-Florence and Hanbali, Hamza and Smedts, Kristien, A COAALA Copula for Stock-Bond Return Co-Movement: Beware of the Beast With Four Tails (May 7, 2019). Available at SSRN: https://ssrn.com/abstract=3384096 or http://dx.doi.org/10.2139/ssrn.3384096

Anne-Florence Allard (Contact Author)

KU Leuven - Department of Accountancy, Finance and Insurance (AFI) ( email )

Naamsestraat 69
Box 3525
Leuven, 3000
Belgium

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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