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

Eiffel Excellence Scholarship Programme 2019 - Apply before December 1st, 2018
News
- 12-11-2018
Interview with Tatiana Kalashnikova & Valeriya Erokhina: two Eiffel 2018...
Nikolaos Tessaromatis speaking on factor investing at the 8th Wealth Management Forum
News
- 12-11-2018
Nikos Tessaromatis, Professor of Finance, EDHEC Business School and Member, EDHEC-Risk...
A Reinterpretation of the Optimal Demand for Risky Assets in Fund Separation Theorems - EDHEC-Risk Institute research article in Management Science
News
- 12-11-2018
We are pleased to enclose an EDHEC-Risk Institute research article published in the...
OTHERWISE#7 : NEW WAYS FOR ECONOMY AND BUSINESS
News
- 09-11-2018
Artificial Intelligence at the heart of Otherwise #7: « Our business school’s digital...