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.

Type: Working paper
Date: le 07/04/2008
Research Cluster : Finance

See Also

EDHEC-Risk Instute paper on value in sovereign bond markets accepted by the Journal of Fixed Income
News
- 12-09-2019
We are pleased to enclose an EDHEC-Risk Institute research article published in the...
EDHEC Faculty welcomes Oxford professor Renée B. Adams for a reseach seminar
News
- 11-09-2019
On September 12, 2019, EDHEC faculty will be delighted to welcome Oxford professor...
Riccardo Rebonato will unveil the results of the 12th EDHEC-Risk European ETF & Smart Beta Survey on Sept 23 in London
News
- 03-09-2019
Riccardo Rebonato, Professor of Finance, EDHEC Business School, EDHEC-Risk Institute,...
Launch of the
News
- 03-09-2019
EDHEC Business School and Scientific Beta have announced the launch of the “Advanced...