When is a copula constant? A test for changing relationships

Fabio Busetti () and Andrew C. Harvey

Cambridge Working Papers in Economics from Faculty of Economics, University of Cambridge

Abstract: A copula defines the probability that observations from two time series lie below given quantiles. It is proposed that stationarity tests constructed from indicator variables be used to test against the hypothesis that the copula is changing over time. Tests associated with different quantiles may point to changes in different parts of the copula, with the lower quantiles being of particular interest in financial applications concerned with risk. Tests located at the median provide an overall test of a changing relationship. The properties of various tests are compared and it is shown that they are still effective if pre-filtering is carried out to correct for changing volatility or, more generally, changing quantiles. Applying the tests to daily stock return indices in Korea and Thailand over the period 1995-9 indicates that the relationship between them is not constant over time.

Keywords: Concordance; quantile; rank correlation; stationarity test; tail dependence. (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ecm and nep-sea
Date: 2008-08
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