Dependence of Stock Returns in Bull and Bear Markets

Dobric Jadran (), Frahm Gabriel () and Schmid Friedrich ()
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Dobric Jadran: Credit Risk Control, WGZ BANK AG, Düsseldorf, Germany
Frahm Gabriel: Chair for Applied Stochastics and Risk Management, Helmut Schmidt University, Hamburg, Germany
Schmid Friedrich: University of Cologne, Germany

Dependence Modeling, 2013, vol. 1, issue 2013, 94-110

Abstract: Despite of its many shortcomings, Pearson’s rho is often used as an association measure for stock returns. A conditional version of Spearman’s rho is suggested as an alternative measure of association. This approach is purely nonparametric and avoids any kind of model misspecification. We derive hypothesis tests for the conditional rank-correlation coefficients particularly arising in bull and bear markets and study their finite-sample performance by Monte Carlo simulation. Further, the daily returns on stocks contained in the German stock index DAX 30 are analyzed. The empirical study reveals significant differences in the dependence of stock returns in bull and bear markets.

Keywords: Bear market; bootstrapping; bull market; conditional Spearman’s rho; copulas; Monte Carlo simulation; Pearson’s rho; stock returns (search for similar items in EconPapers)
Date: 2013
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:vrs:demode:v:1:y:2013:i::p:94-110:n:5

DOI: 10.2478/demo-2013-0005

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