Testing the bivariate distribution of daily equity returns using copulas. An application to the Spanish stock market

Authors:
Oriol Roch;Antonio Alegre
Affiliations:
Dept. Matemítica Econòmica, Financera i Actuarial, Universitat de Barcelona, Avda. Diagonal 690, 08034 Barcelona, Spain;Dept. Matemítica Econòmica, Financera i Actuarial, Universitat de Barcelona, Avda. Diagonal 690, 08034 Barcelona, Spain
Venue:
Computational Statistics & Data Analysis
Year:
2006

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Abstract

The problem of the identification of dependencies between time series of equity returns is analyzed. Marginal distribution functions are assumed to be known, and a bivariate chi-square test of fit is applied in a fully parametric copula approach. Several marginal models and families of copulas are fitted and compared with Spanish stock market data. The results show the difficulty in adjusting the bivariate distribution of raw returns, and highlight the effect of a GARCH filtering in the selection of the best fitting copula.