Measuring Comovements by Regression Quantiles

50 Pages Posted: 28 Jul 2005

See all articles by Lorenzo Cappiello

Lorenzo Cappiello

European Central Bank (ECB)

Simone Manganelli

European Central Bank (ECB)

Bruno Gerard

BI Norwegian Business School - Department of Finance

Date Written: July 2005

Abstract

This paper develops a rigorous econometric framework to investigate the structure of codependence between random variables and to test whether it changes over time. Our approach is based on the computation - over both a test and a benchmark period - of the conditional probability that a random variable yt is lower than a given quantile, when the other random variable xt is also lower than its corresponding quantile, for any set of prespecified quantiles. Time-varying conditional quantiles are modeled via regression quantiles. The conditional probability is estimated through a simple OLS regression. We illustrate the methodology by investigating the impact of the crises of the 1990s on the major Latin American equity markets returns. Our results document significant increases in equity return co-movements during crises consistent with the presence of financial contagion.

Keywords: codependence, semi-parametric, conditional quantiles

JEL Classification: C14, C22, G15

Suggested Citation

Cappiello, Lorenzo and Manganelli, Simone and Gerard, Bruno, Measuring Comovements by Regression Quantiles (July 2005). ECB Working Paper No. 501. Available at SSRN: https://ssrn.com/abstract=742507

Lorenzo Cappiello (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany
+49 69 1344 8765 (Phone)

Simone Manganelli

European Central Bank (ECB) ( email )

Kaiserstrasse 29
Frankfurt am Main, 60311
Germany

HOME PAGE: http://www.simonemanganelli.org

Bruno Gerard

BI Norwegian Business School - Department of Finance ( email )

Nydalsveien 37
Oslo, N-0484
Norway
+4746410506 (Phone)

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