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Inversions Distribution and Testing Correlation Changes for Rates of Return

Author

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  • Mariusz Czekala
  • Zbigniew Kurylek

Abstract

Purpose: The paper presents the application of a test based on the inversions number distribution. The purpose of the work is to examine the stability of dependence measures between rates of return for financial instruments. Design/Methodology/Approach: The issue plays a vital role in portfolio analysis because dependence measures are an essential factor affecting the portfolio risk of financial instruments. Direct application of the classic measure of dependence, such as Pearson's correlation coefficient, requires several additional assumptions regarding the existence of moments or the normality of the distribution of random variables analyzed. Therefore, the choice falls on the tau Kendall coefficient. Findings: First of all, it is suitable for testing distributions for which variance does not exist (e.g., stable distributions). Secondly, we present a new way of testing the hypothesis about the equality of the Kendall coefficient over two separate periods. A miniature sample version was introduced in the article. An essential feature of the proposed test is the ability to calculate its power analytically.

Suggested Citation

  • Mariusz Czekala & Zbigniew Kurylek, 2021. "Inversions Distribution and Testing Correlation Changes for Rates of Return," European Research Studies Journal, European Research Studies Journal, vol. 0(3B), pages 633-650.
    • Handle: RePEc:ers:journl:v:xxiv:y:2021:i:3b:p:633-650
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    References listed on IDEAS

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    More about this item

    Keywords

    Inversions; risk; Kendall tau; portfolio analysis; stable distribution; rate of returns; power of the test.;
    All these keywords.

    JEL classification:

    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
    • C46 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Specific Distributions
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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