Test of the Gaussian Copula on the Swedish Stock Market

Jonas Söderberg ()
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Jonas Söderberg: Centre for Labour Market Policy Research (CAFO), Postal: Centre for Labour Market Policy Research (CAFO), Dept of Economics and Statistics, School of Management and Economics, Växjö University , SE 351 95 Växjö, Sweden

No 2009:9, CAFO Working Papers from Linnaeus University, Centre for Labour Market Policy Research (CAFO), School of Business and Economics

Abstract: This paper examines whether the pairwise comovement between stocks quoted on the Stockholm stock exchange can be correctly quantified by the Gaussian copula, i.e., by linear correlation. Two different methods are used to test whether the dependence on the Swedish stock market can be modeled by the Gaussian copula. From these tests, we come to the conclusion that the Gaussian copula is not an appropriate choice of copula for the Swedish stock market. We also come to the same conclusion when observing sector and industry indices on the Swedish stock market. However, if performing a GARCH filtering of the return series, there is a substantial decrease in the number of pairs of either stocks or indices for which the Gaussian copula can be rejected. For the two test methods, a notable difference in the rejection rate of the Gaussian copula can also be observed.

Keywords: Risk management; Gaussian copula; Swedish stock markets; GARCH filtering (search for similar items in EconPapers)
JEL-codes: C52 G11 G32 (search for similar items in EconPapers)
Pages: 24 pages
Date: 2008-12-01
New Economics Papers: this item is included in nep-fmk and nep-rmg
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