A New Time-Varying Asymmetric Copula Analysis of the EU Sovereign Debt Crisis

Abstract

This paper considers the time-varying asymmetric correlation between the stock and government bond price returns of the five peripheral EU countries during the EU sovereign crisis. To this end this paper proposes a new asymmetric copula using the split-normal distribution. The time-varying correlation coefficients are estimated by the particle filter method in the state-space framework. It finds a strong asymmetry in the early stage of the crisis, namely positive lower-tail correlation and negative upper-tail correlation of the stock-bond distribution, which the other copulas cannot express. It also finds that the signs of the correlations changed from negative to positive in the crisis.