Asymmetric Dependence between Aggregate Consumption and Financial Risk

Cathy Ning and Loran Chollete ()
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Loran Chollete: University of Stavanger, Stavanger, NO

No 46, Working Papers from Toronto Metropolitan University, Department of Economics

Abstract: When aggregate consumption and risk factors exhibit asymmetric dependence, diversification becomes complicated and markets may face spillover risk between the real and financial sector. Moreover, empirical analyses based on second moments will not detect the true risk structure. We analyze dependence of US aggregate consumption and risk factors, using copulas. Interestingly for research on spillovers, we find evidence of downside dependence between consumption and industry risk, and between consumption and market and size factors. We discover significant dynamics in dependence between consumption and the size factor. Thus, consumption and financial risk may exhibit time variation in downside risk. Our results provide quantitative evidence on susceptibility of financial markets to diversification problems, and on spillover risk between real and financial sectors.

Keywords: Asymmetric Dependence; Aggregate Consumption; Diversification; Spillover Risk; Time-Varying Downside Risk (search for similar items in EconPapers)
JEL-codes: C14 E21 E44 G01 G11 (search for similar items in EconPapers)
Pages: 34 pages
Date: 2012-10
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