Busetti, F. and Harvey, A. C.

When is a copula constant? A test for changing relationships

Journal of Financial Econometrics

Vol. 9(1) pp. 106-131 (2011)

Abstract: A copula defines the probability that observations from two time series lie below given quantiles. It is proposed that stationarity tests constructed from indicator variables be used to test against the hypothesis that the copula is changing over time. Tests associated with different quantiles may point to changes in different parts of the copula. The tests are still effective when prefiltering is carried out to correct for persistent changes in volatility. However, a “median quadrant association test” that is robust to changing volatility provides a good overall test against a time-varying copula. An empirical illustration on financial contagion is provided.

JEL Codes: C12, G32

Author links: Andrew Harvey  

Publisher's Link: http://jfec.oxfordjournals.org/content/9/1.toc