A New Asymmetric Copula with Reversible Correlations and Its Application to the EU Sovereign Debt Crisis

TL;DR

This paper introduces a new asymmetric copula that allows independent control of tail correlations, demonstrating its application in analyzing the changing correlation patterns among EU countries during the sovereign debt crisis.

Contribution

It presents a novel asymmetric copula based on split normal distribution capable of reversible tail correlations, with an application to EU sovereign debt crisis data.

Findings

EU periphery countries' lower tail correlation changed from negative to positive after the crisis

Germany's stock-bond correlation remained negative before and after the crisis

The copula effectively captures asymmetric tail dependence in financial data

Abstract

This paper proposes a novel asymmetric copula based upon bivariate split normal distribution. This copula can change correlation signs of its upper and lower tails of distribution independently. As an application, it is shown by the rolling maximum likelihood estimation that the EU periphery countries changed sign of the lower tail correlation coefficient from negative to positive after the sovereign debt crisis started. In contrast, Germany had negative stock-bond correlation before and after the crisis.