Articlegreen2010

When is a Copula Constant? A Test for Changing Relationships

98 citations0/0 files storedJournal of Financial Econometrics

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Financial Risk and Volatility Modeling Stochastic processes and financial applications Complex Systems and Time Series Analysis

Abstract

A copula defines the probability that observations from two time series lie below given quantiles. It is proposed that stationarity tests constructed from indicator variables be used to test against the hypothesis that the copula is changing over time. Tests associated with different quantiles may point to changes in different parts of the copula, with the lower quantiles being of particular interest in financial applications concerned with risk. Tests located at the median provide an overall test of a changing relationship. The properties of various tests are compared and it is shown that they are still effective if pre-filtering is carried out to correct for changing volatility or, more generally, changing quantiles. Applying the tests to daily stock return indices in Korea and Thailand over the period 1995-9 indicates that the relationship between them is not constant over time.

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References

1992Testing the null hypothesis of stationarity against the alternative of a unit root 2002No Contagion, Only Interdependence: Measuring Stock Market Comovements 2004CAViaR 2006MODELLING ASYMMETRIC EXCHANGE RATE DEPENDENCE*2004Copula Methods in Finance 1994Multivariate Stochastic Variance Models 2003Modelling Dependence with Copulas and Applications to Risk Management 2011Quantitative Risk Management

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