Dependence of stock returns in bull and bear markets

Jadran Dobrić, Gabriel Frahm and Friedrich Schmid

No 9/07, Discussion Papers in Econometrics and Statistics from University of Cologne, Institute of Econometrics and Statistics

Abstract: Pearson's correlation coefficient is typically used for measuring the dependence structure of stock returns. Nevertheless, it has many shortcomings often documented in the literature. We suggest to use a conditional version of Spearman's rho as an alternative dependence measure. Our approach is purely nonparametric and we avoid any kind of model misspecification. We derive hypothesis tests for the conditional Spearman's rho in bull andbearmarkets and verify the tests by Monte Carlo simulation.Further, we study the daily returns of stocks contained in the German stock index DAX 30. We find some significant differences in dependence of stock returns in bull and bear markets. On the other hand the differences are not so strong as one might expect.

Keywords: bear market; bootstrapping; bull market; conditional Spearman's rho; copulas; Monte Carlo simulation; stock returns (search for similar items in EconPapers)
JEL-codes: C12 C14 (search for similar items in EconPapers)
Date: 2007
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Citations: View citations in EconPapers (1)

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