MODELING HIGH DIMENSIONAL ASSET PRICING RETURNS USING A DYNAMIC SKEWED COPULA MODEL
Keywords:
Skewed copula, Dynamic model, High dimensions, Multivariate dependence
Abstract
We propose a dynamic skewed copula to model multivariate dependence in asset returns in a flexible yet parsimonious way. We then apply the model to 50 exchange traded funds. The new copula is shown to have better in-sample and out-of-sample performance than existing copulas. In particular, the dynamic model is able to capture increasing dependence patterns during the fixnancial crisis periods. It is crucial for investors to take dynamic dependence structure into account when modeling high dimensional returns.
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References
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Pukthuanthong, K., and Roll, R. (2011). Gold and The Dollar (and The Euro,
Pound, and Yen). Journal of Banking and Finance, 35, 2070–2083.
Rodriguez, J. (2007). Measuring Financial Contagion: A Copula Approach. Journal
of Empirical Finance, 14, 401–423.
Sari, R., Hammoudeh, S., and Soytas, U. (2010). Dynamics of Oil Price, Precious
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Between Stock and Bond Returns with Dynamic Copulas. Journal of Empirical
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Wu, C. C., and Lin, Z. Y. (2014). An Economic Evaluation of Stock-Bond Return
Comovements with Copula-Based Garch Models. Quantitative Finance, 14,
1283-1296.
Zhu, D., and Galbraith, J. W. (2011). Modeling and Forecasting Expected Shortfall
with The Generalized Asymmetric Student-T and Asymmetric Exponential
Power Distributions. Journal of Empirical Finance, 18, 765-778.
Journal of Banking and Finance, 32, 326–337.
Caporale, G. M., Cipollini, A., and Spagnolo, N. (2005). Testing For Contagion: A
Conditional Correlation Analysis. Journal of Empirical Finance, 12, 476–489.
Chan, K. F., Treepongkaruna, S., Brooks, R., and Gray, S. (2011). Asset Market
Linkages: Evidence from Financial, Commodity and Real Estate Assets. Journal
of Banking and Finance, 35, 1415– 1426.
Christoffersen, P., Errunza, V., Jacobs, K., and Langlois, H. (2012). Is the Potential
for International Diversification Disappearing? A Dynamic Copula Approach.
Review of Financial Studies, 25, 3711–3751.
Demarta, S., and McNeil, A. (2005). The T Copula and Related Copulas. International
Statistical Review, 73, 111–129.
Elkamhi, R., and Stefanova, D. (2015). Dynamic Hedging and Extreme Asset Co-
Movements. Review of Financial Studies, 28, 743–790.
Engle, R. (2002). Dynamic Conditional Correlation. Journal of Business and Economic
Statistics, 20, 339–350.
Engle, R., Shephard, N., and Shepphard, K. (2008). Fitting Vast Dimensional Time-
Varying Covariance Models. OFRC Working Papers Series.
Genest, C., Gendron, M., and Bourdeau-Brien, M. (2009). The Advent of Copulas
in Finance. The European Journal of Finance, 15, 609-618.
Gonzalez-Pedraz, C., Moreno, M., and Pena, J. I. (2015). Portfolio Selection with
Commodities Under Conditional Copulas and Skew Preferences. Quantitative
Finance, 15, 151-170.
Guegan, D., and Zhang, J. (2010). Change Analysis of a Dynamic Copula for
Measuring Dependence in Multivariate Financial Data. Quantitative Finance,
10, 421-430.
Hansen, P. (2005). A Test for Superior Predictive Ability. Journal of Business and
Economic Statistics, 23, 365–380.
Hong, Y., Tu, J., and Zhou, G. (2007). Asymmetries in Stock Returns: Statistical
Tests and Economic Evaluation. Review of Financial Studies, 20, 1547-1581.
Hsu, P.-H., Hsu, Y.-C., and Kuan, C.-M. (2010). Testing The Predictive Ability of
Technical Analysis Using A New Stepwise Test Without Data Snooping Bias.
Journal of Empirical Finance, 17, 471–484.
Joy, M. (2011). Gold and The Us Dollar: Hedge Or Haven? Finance Research Letters,
8, 120–131.
Kallberg, J., and Pasquariello, P. (2008). Time-Series and Cross-Sectional Excess
Comovement in Stock Indexes. Journal of Empirical Finance, 15, 481–502.
Lee, T., and Long, X. (2009). Copula-Based Multivariate Garch Model with
Uncorrelated Dependent Errors. Journal of Econometrics, 150, 207-218.
Mollick, A. V., and Assefa, T. A. (2013). US Stock Returns and Oil Prices: The Tale
from Daily Data and the 2008-2009 Financial Crisis. Energy Economics, 36, 1-18.
Narayan, P., and Bannigidadmath, D. (2015). Do Indian Stock Returns Predictable?
Journal of Banking and Finance, 58, 506-531.
Oh, D., and Patton, A. (2015). High-Dimensional Copula-Based Distributions with
Mixed Frequency Data. Working paper, Duke University.
Okimoto, T. (2008). New Evidence of Asymmetric Dependence Structures in
International Equity Markets. Journal of Financial and Quantitative Analysis, 43,
787-815.
Patton, A. (2006). Modelling Asymmetric Exchange Rate Dependence. International
Economic Review, 47, 527–556.
Patton, A. (2009). Copula-Based Models for Financial Time Series. Handbook of
Financial Time Series, 767-785.
Patton, A. J. (2004). On The Out-Of-Sample Importance of Skewness and
Asymmetric Dependence for Asset Allocation. Journal of Financial Econometrics,
2, 130-168.
Pukthuanthong, K., and Roll, R. (2011). Gold and The Dollar (and The Euro,
Pound, and Yen). Journal of Banking and Finance, 35, 2070–2083.
Rodriguez, J. (2007). Measuring Financial Contagion: A Copula Approach. Journal
of Empirical Finance, 14, 401–423.
Sari, R., Hammoudeh, S., and Soytas, U. (2010). Dynamics of Oil Price, Precious
Metal Prices, and Exchange Rate. Energy Economics, 32, 351-362.
Wu, C. C., and Liang, S. S. (2011). The Economic Value of Range-Based Covariance
Between Stock and Bond Returns with Dynamic Copulas. Journal of Empirical
Finance, 18, 711-727.
Wu, C. C., and Lin, Z. Y. (2014). An Economic Evaluation of Stock-Bond Return
Comovements with Copula-Based Garch Models. Quantitative Finance, 14,
1283-1296.
Zhu, D., and Galbraith, J. W. (2011). Modeling and Forecasting Expected Shortfall
with The Generalized Asymmetric Student-T and Asymmetric Exponential
Power Distributions. Journal of Empirical Finance, 18, 765-778.
Published
2019-04-30
How to Cite
Gong, Y., Liang, J., & Zhu, J. (2019). MODELING HIGH DIMENSIONAL ASSET PRICING RETURNS USING A DYNAMIC SKEWED COPULA MODEL. Buletin Ekonomi Moneter Dan Perbankan, 22(1), 1 - 28. https://doi.org/10.21098/bemp.v22i1.1044
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Buletin Ekonomi Moneter dan Perbankan / Bulletin of Monetary Economics and Banking is licensed under a Creative Commons Attribution-NonCommercial 4.0 International License.
