Dependence Structure of Market States

Journal of Statistical Mechanics: Theory and Experiment, 2015(8):P08012, 2015

19 Pages Posted: 7 Mar 2020

See all articles by Desislava Chetalova

Desislava Chetalova

University of Duisburg-Essen

Marcel Kremer

University of Duisburg-Essen

Rudi Schäfer

University of Duisburg-Essen

Date Written: February 7, 2020

Abstract

We study the dependence structure of market states by calculating empirical pairwise copulas of daily stock returns. We consider both original returns, which exhibit time-varying trends and volatilities, as well as locally normalized returns, where the nonstationarity has been removed. The empirical pairwise copula for each state is compared with a bivariate K-copula. This copula arises from a recently introduced random matrix model, in which nonstationary correlations between returns are modeled by an ensemble of random matrices. The comparison reveals overall good agreement between empirical and analytical copulas, especially for locally normalized returns. Still, there are some deviations in the tails. Furthermore, we find an asymmetry in the dependence structure of market states. The empirical pairwise copulas exhibit a stronger lower tail dependence, particularly in times of crisis.

Keywords: Copulas, Market states, Nonstationarity, Asymmetry, Multivariate mixture, K-copula

JEL Classification: C13, C46, C55, G12, G10

Suggested Citation

Chetalova, Desislava and Kremer, Marcel and Schäfer, Rudi, Dependence Structure of Market States (February 7, 2020). Journal of Statistical Mechanics: Theory and Experiment, 2015(8):P08012, 2015. Available at SSRN: https://ssrn.com/abstract=3533951

Desislava Chetalova (Contact Author)

University of Duisburg-Essen ( email )

Lotharstrasse 1
Duisburg, 47048
Germany

Marcel Kremer

University of Duisburg-Essen ( email )

Universitaetsstrasse 12
Essen, 45141
Germany

HOME PAGE: http://www.lef.wiwi.uni-due.de/en/team/marcel-kremer/

Rudi Schäfer

University of Duisburg-Essen ( email )

Lotharstrasse 1
Duisburg, 47048
Germany

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