Frequent Turbulence? A Dynamic Copula Approach

Lorán Chollete () and Andréas Heinen
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Lorán Chollete: Dept. of Finance and Management Science, Norwegian School of Economics and Business Administration, Postal: NHH , Department of Finance and Management Science, Helleveien 30, N-5045 Bergen, Norway, http://www.nhh.no/for/cv/chollete-loran.htm

No 2006/10, Discussion Papers from Norwegian School of Economics, Department of Business and Management Science

Abstract: How common and how persistent are turbulent periods? We address these questions by developing and applying a dynamic dependence framework. In order to answer the first question we estimate an unconditional mixture model of normal copulas, based on both economic and econometric justification. In order to answer the second question, we develop and estimate a hidden markov model of copulas, which allows for dynamic clustering of correlations. These models permit one to infer the relative importance of turbulent and quiescent periods in international markets. Empirically, the three most striking findings are as follows. First, for the unconditional model, turbulent regimes are more common. Second, the conditional copula model dominates the unconditional model. Third, turbulent regimes tend to be more persistent.

Keywords: International Markets; Turbulence; Hidden Markov Model; Copula (search for similar items in EconPapers)
JEL-codes: C14 C22 C50 F30 G15 (search for similar items in EconPapers)
Pages: 43 pages
Date: 2006-10-11
New Economics Papers: this item is included in nep-ecm, nep-ets, nep-fin and nep-rmg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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