Dependence Structure and Extreme Comovements in International Equity and Bond Markets with Portfolio Diversification Effects

Equity returns are more dependent in bear markets than in bull markets.

Author(s):

Rene Garcia

EDHEC Business School

Georges Tsafack

Suffolk University

Previous studies have argued that a multivariate GARCH model or a regime switching (RS) model based on normal innovations could reproduce this asymmetric extreme dependence. We show analytically that it cannot be the case. We propose an alternative model that allows for tail dependence in lower returns and keeps tail independence for upper returns. This model is applied to international equity and bond markets to investigate their dependence structure. It includes one normal regime in which dependence is symmetric and a second regime characterized by asymmetric dependence. Empirically, we find that dependence between equities and bonds is low even in the same country, while dependence between international assets of the same type is high in both regimes, especially in the asymmetric regime. Empirical phenomena such as home bias investment and flight to safety are amplified by asymmetric dependence through coskewness.
Pdf
Dependence Structure and Extreme Comovements in International Equity and Bond Ma...
(-1.00 B)
Type: Working paper
Date: le 07/04/2008
Extra information : Pour plus d'informations, nous vous prions de vous adresser à Joanne Finlay, Direction de la recherche de l'EDHEC [ joanne.finlay@edhec.edu] Les opinions exprimées sont celles de l'auteur et n'engagent pas la responsabilité de l'EDHEC.
Research Cluster : Finance

See Also

LegalEDHEC present to foster legal innovation
News
- 20-06-2018
On major political subjects, as well as on legal innovation, the LegalEDHEC Research...
 THE ECONOMETRIC SOCIETY - NORTH AMERICA SUMMER MEETING - June 2018
News
- 19-06-2018
Two PhD in Finance alumni Andrea Tarelli, PhD (2014) and François Cocquemas, PhD (2016...
Great success for the 25th EDHEC Raid
News
- 19-06-2018
"A big thank you to the whole Raid EDHEC team! A top team for an incredible raid. I can...
EDHEC ranked in the world’s top 3 business schools for Finance by the Financial Times
News
- 18-06-2018
EDHEC Business School has consolidated its standing in the Financial Times global...