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232
Modelling asymmetric exchange rate dependence
 International Economic Review
"... We test for asymmetry in a model of the dependence between the Deutsche mark and the yen, in the sense that a different degree of correlation is exhibited during joint appreciations against the U.S. dollar versus during joint depreciations. We consider an extension of the theory of copulas to allow ..."
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Cited by 243 (6 self)
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We test for asymmetry in a model of the dependence between the Deutsche mark and the yen, in the sense that a different degree of correlation is exhibited during joint appreciations against the U.S. dollar versus during joint depreciations. We consider an extension of the theory of copulas to allow for conditioning variables, and employ it to construct flexible models of the conditional dependence structure of these exchange rates. We find evidence that the mark–dollar and yen–dollar exchange rates are more correlated when they are depreciating against the dollar than when they are appreciating. 1.
Dynamic consumption and portfolio choice with stochastic volatility in incomplete markets
, 2003
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On the OutofSample Importance of Skewness and Asymmetric Dependence for Asset Allocation
 Journal of Financial Econometrics
, 2004
"... Recent studies in the empirical finance literature have reported evidence of two types of asymmetries in the joint distribution of stock returns. The first is skewness in the distribution of individual stock returns. The second is an asymmetry in the dependence between stocks: stock returns appear t ..."
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Cited by 107 (6 self)
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Recent studies in the empirical finance literature have reported evidence of two types of asymmetries in the joint distribution of stock returns. The first is skewness in the distribution of individual stock returns. The second is an asymmetry in the dependence between stocks: stock returns appear to be more highly correlated during market downturns than during market upturns. In this article we examine the economic and statistical significance of these asymmetries for asset allocation decisions in an outofsample setting. We consider the problem of a constant relative risk aversion (CRRA) investor allocating wealth between the riskfree asset, a smallcap portfolio, and a largecap portfolio. We use models that can capture timevarying moments up to the fourth order, and we use copula theory to construct models of the timevarying dependence structure that allow for different dependence during bear markets than bull markets. The importance of these two asymmetries for asset allocation is assessed by comparing the performance of a portfolio based on a normal distribution model with a portfolio based on a more flexible distribution model. For investors with no shortsales constraints, we find that knowledge of higher moments and asymmetric dependence leads to gains that are economically significant and statistically significant in some cases. For short salesconstrained investors the gains are limited.
Volatility Spillover Effects in European Equity Markets
 JOURNAL OF FINANCIAL AND QUANTITATIVE ANALYSIS
, 2004
"... This paper investigates to what extent globalization and regional integration lead to increasing equity market interdependence. I focus on the case of Western Europe, as this region has gone through a unique period of economic, financial, and monetary integration. More specifically, I quantify the m ..."
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Cited by 106 (6 self)
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This paper investigates to what extent globalization and regional integration lead to increasing equity market interdependence. I focus on the case of Western Europe, as this region has gone through a unique period of economic, financial, and monetary integration. More specifically, I quantify the magnitude and timevarying nature of volatility spillovers from the aggregate European (EU) and US market to 13 local European equity markets. To account for timevarying integration, I allow the shock sensitivities to change through time by means of a regimeswitching model. I find that these regime switches are both statistically and economically important. While both the EU and US shock spillover intensity has increased over the 1980s and 1990s, the rise is more pronounced for EU spillovers. In most countries, shock spillover intensities increased most strongly in the second half of 1980s and the first half of the 1990s. Increased trade integration, equity market development, and low inflation are shown to have contributed to the increase in EU shock spillover intensity. Finally, I find some evidence for contagion from the US market to a number of local European equity markets during periods of high world market volatility.
Learning under Ambiguity
 Review of Economic Studies
, 2002
"... This paper considers learning when the distinction between risk and ambiguity matters. It first describes thought experiments, dynamic variants of those provided by Ellsberg, that highlight a sense in which the Bayesian learning model is extremeit models agents who are implausibly ambitious about w ..."
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Cited by 65 (9 self)
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This paper considers learning when the distinction between risk and ambiguity matters. It first describes thought experiments, dynamic variants of those provided by Ellsberg, that highlight a sense in which the Bayesian learning model is extremeit models agents who are implausibly ambitious about what they can learn in complicated environments. The paper then provides a generalization of the Bayesian model that accommodates the intuitive choices in the thought experiments. In particular, the model allows decisionmakers ’ confidence about the environment to change — along with beliefs — as they learn. A portfolio choice application compares the effect of changes in confidence under ambiguity versus changes in estimation risk under Bayesian learning. The former is shown to induce a trend towards more stock market participation and investment even when the latter does not. 1
Beyond Correlation: Extreme Comovements Between Financial Assets
, 2002
"... This paper inv estigates the potential for extreme comov ements between financial assets by directly testing the underlying dependence structure. In particular, a tdependence structure, deriv ed from the Student t distribution, is used as a proxy to test for this extremal behav#a(0 Tests in three ..."
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Cited by 61 (5 self)
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This paper inv estigates the potential for extreme comov ements between financial assets by directly testing the underlying dependence structure. In particular, a tdependence structure, deriv ed from the Student t distribution, is used as a proxy to test for this extremal behav#a(0 Tests in three di#erent markets (equities, currencies, and commodities) indicate that extreme comov ements are statistically significant. Moreov er, the "correlationbased" Gaussian dependence structure, underlying the multiv ariate Normal distribution, is rejected with negligible error probability when tested against the tdependencealternativ e. The economic significance of these results is illustratedv ia three examples: comov ements across the G5 equity markets; portfoliov alueatrisk calculations; and, pricing creditderiv ativ es. JEL Classification: C12, C15, C52, G11. Keywords: asset returns, extreme comov ements, copulas, dependence modeling, hypothesis testing, pseudolikelihood, portfolio models, risk management. # The authorsw ould like to thankAndrew Ang, Mark Broadie, Loran Chollete, and Paul Glasserman for their helpful comments on an earlier version of this manuscript. Both authors arewS; the Columbia Graduate School of Business, email: {rm586,assaf.zeevi}@columbia.edu, current version available at www.columbia.edu\# rm586 1 Introducti7 Specification and identification of dependencies between financial assets is a key ingredient in almost all financial applications: portfolio management, risk assessment, pricing, and hedging, to name but a few. The seminal work of Markowitz (1959) and the early introduction of the Gaussian modeling paradigm, in particular dynamic Brownianbased models, hav e both contributed greatly to making the concept of co rrelatio almost synony...
Estimation of multivariate models for time series of possibly different lenghts
 Journal of Applied Econometrics
, 2006
"... We consider the problem of estimating parametric multivariate density models when unequal amounts of data are available on each variable. We focus in particular on the case that the unknown parameter vector may be partitioned into elements relating only to a marginal distribution and elements relati ..."
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Cited by 60 (5 self)
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We consider the problem of estimating parametric multivariate density models when unequal amounts of data are available on each variable. We focus in particular on the case that the unknown parameter vector may be partitioned into elements relating only to a marginal distribution and elements relating to the copula. In such a case we propose using a multistage maximum likelihood estimator (MSMLE) based on all available data rather than the usual onestage maximum likelihood estimator (1SMLE) based only on the overlapping data. We provide conditions under which the MSMLE is not less asymptotically efficient than the 1SMLE, and we examine the small sample efficiency of the estimators via simulations. The analysis in this paper is motivated by a model of the joint distribution of daily Japanese yen–US dollar and euro–US dollar exchange rates. We find significant evidence of time variation in the conditional copula of these exchange rates, and evidence of greater dependence during extreme events than under the normal distribution. Copyright © 2006
Dependence patterns across financial markets: A mixed copula approach
 Applied Financial Economics
, 2006
"... Using the concept of a copula, this paper shows how to estimate association across financial markets, with a focus on the structure of dependence rather than the degree of dependence. A mixed copula model is constructed so that it can capture various patterns of dependence structures. The methodolog ..."
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Cited by 56 (0 self)
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Using the concept of a copula, this paper shows how to estimate association across financial markets, with a focus on the structure of dependence rather than the degree of dependence. A mixed copula model is constructed so that it can capture various patterns of dependence structures. The methodology is applied to estimate the dependence across several international stock markets. The empirical findings are shown to have some implications that seem important for a wide range of multivariate studies in Economics and Finance.
Optimal portfolio allocation under higher moments.
 European Financial Management
, 2006
"... Abstract We evaluate how departure from normality may affect the allocation of assets. A Taylor series expansion of the expected utility allows to focus on certain moments and to compute the optimal portfolio allocation numerically. A decisive advantage of this approach is that it remains operation ..."
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Cited by 55 (6 self)
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Abstract We evaluate how departure from normality may affect the allocation of assets. A Taylor series expansion of the expected utility allows to focus on certain moments and to compute the optimal portfolio allocation numerically. A decisive advantage of this approach is that it remains operational even for a large number of assets. While the meanvariance criterion provides a good approximation of the expected utility maximisation under moderate nonnormality, it may be ineffective under large departure from normality. In such cases, the threemoment or fourmoment optimisation strategies may provide a good approximation of the expected utility.
HOW SOVEREIGN IS SOVEREIGN CREDIT RISK?
"... Abstract. We study the nature of sovereign credit risk using an extensive sample of CDS spreads for 26 developed and emergingmarket countries. Sovereign credit spreads are surprisingly highly correlated, with just three principal components accounting for more than 50 percent of their variation. So ..."
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Cited by 51 (2 self)
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Abstract. We study the nature of sovereign credit risk using an extensive sample of CDS spreads for 26 developed and emergingmarket countries. Sovereign credit spreads are surprisingly highly correlated, with just three principal components accounting for more than 50 percent of their variation. Sovereign credit spreads are generally more related to the U.S. stock and highyield bond markets, global risk premia, and capital flows than they are to their own local economic measures. We find that the excess returns from investing in sovereign credit are largely compensation for bearing global risk, and that there is little or no countryspecific credit risk premium. A significant amount of the variation in sovereign credit returns can be forecast using U.S. equity, volatility, and bond market risk premia.