THE JOINT DISTRIBUTION OF STOCK RETURNS IS NOT ELLIPTICAL

Rémy Chicheportiche () and Jean-Philippe Bouchaud ()
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Rémy Chicheportiche: Capital Fund Management, 6–8 Boulevard Haussmann, Paris, 75009, France
Jean-Philippe Bouchaud: Capital Fund Management, 6–8 Boulevard Haussmann, Paris, 75009, France

International Journal of Theoretical and Applied Finance (IJTAF), 2012, vol. 15, issue 03, 1-23

Abstract: Using a large set of daily US and Japanese stock returns, we test in detail the relevance of Student models, and of more general elliptical models, for describing the joint distribution of returns. We find that while Student copulas provide a good approximation for strongly correlated pairs of stocks, systematic discrepancies appear as the linear correlation between stocks decreases, that rule out all elliptical models. Intuitively, the failure of elliptical models can be traced to the inadequacy of the assumption of a single volatility mode for all stocks. We suggest several ideas of methodological interest to efficiently visualise and compare different copulas. We identify the rescaled difference with the Gaussian copula and the central value of the copula as strongly discriminating observables. We insist on the need to shun away from formal choices of copulas with no financial interpretation.

Keywords: Copulas; stock returns; multivariate distribution; linear correlation; Non-linear dependences; Student distribution; elliptical distributions (search for similar items in EconPapers)
Date: 2012
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Citations: View citations in EconPapers (13)

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DOI: 10.1142/S0219024912500197

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