Time Variation in Asset Return Dependence: Strength or Structure?

Thijs Markwat, Erik Kole () and Dick van Dijk

ERIM Report Series Research in Management from Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus University Rotterdam

Abstract: The dependence between asset returns varies. Its strength can become stronger or weaker. Also, its structure can change, for example, when asymmetries related to bull and bear markets become more or less pronounced. To analyze these different types of variations, we develop a model that separately accommodates these changes. It combines a mixture of structurally different copulas with time variation. Our model shows both types of changes in the dependence between several equity market returns. Ignoring them leads to biases in risk measures. An underestimation of Value-at-Risk by maximum 15% occurs exactly when most harmful, during crisis periods.

Keywords: copulas; dependence; international correlations; stock markets (search for similar items in EconPapers)
JEL-codes: C32 F3 G15 (search for similar items in EconPapers)
Date: 2009-10-20
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Citations: View citations in EconPapers (7)

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