Stock Market Asymmetries: A Copula Diffusion

Tinbergen Institute Discussion Papers from Tinbergen Institute

Abstract: The paper proposes a model for the dynamics of stock prices that incorporates increased asset co-movements during extreme market downturns in a continuous-time setting. The model is based on the construction of a multivariate diffusion with a pre-specified stationary density with tail dependence. I estimate the model with Markov Chain Monte Carlo using a sequential inference procedure that proves to be well-suited for the problem. The model is able to reproduce stylized features of the dependence structure and the dynamic behaviour of asset returns.

Keywords: tail dependence; multivariate diffusion; Markov Chain Monte Carlo (search for similar items in EconPapers)
JEL-codes: C11 C51 C58 (search for similar items in EconPapers)
Date: 2012-11-21
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Persistent link: https://EconPapers.repec.org/RePEc:tin:wpaper:20120125

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