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Stock Market Asymmetries: A Copula Diffusion

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  • Denitsa Stefanova

    (VU University Amsterdam)

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.

Suggested Citation

  • Denitsa Stefanova, 2012. "Stock Market Asymmetries: A Copula Diffusion," Tinbergen Institute Discussion Papers 12-125/IV/DSF45, Tinbergen Institute.
    • Handle: RePEc:tin:wpaper:20120125
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    References listed on IDEAS

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    More about this item

    Keywords

    tail dependence; multivariate diffusion; Markov Chain Monte Carlo;
    All these keywords.

    JEL classification:

    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics

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