Les Cahiers de Recherche - HEC Paris
Michael ROCKINGER and Eric JONDEAU
Conditional dependency of financial series : an application of copulas
Abstract: We develop a new methodology that measures conditional
dependency. We achieve this by using copula functions that link marginal
distributions, here chosen to obey a GARCH-type model with time-varying
skewness and kurtosis. We apply this model to daily returns of stock-market
indices. We find strong evidence of persistence in dependency both for
local currency and $ US denominated series. For European stock markets, we
also find evidence that large simultaneous returns of either sign lead to
higher subsequent dependency.
We show that dependency changes through
time, as well. For stock markets within Europe, dependency increased
whereas it decreased since the mid 90s when involving the S&P 500 or the
We also suggest extensions for conditional asset pricing models
involving time variation of co-skewness and co-kurtosis.
Keywords: international correlation; market integration; Arch; stock indices; exchange rates; (follow links to similar papers)
JEL-Codes: C51; F39; G11; (follow links to similar papers)
43 pages, February 1, 2001
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