Randomization Tests for Equality in Dependence Structure

Abstract

We develop a new statistical procedure to test whether the dependence structure is identical between two groups. Rather than relying on a single index such as Pearson’s correlation coefficient or Kendall’s τ, we consider the entire dependence structure by investigating the dependence functions (copulas). The critical values are obtained by a modified randomization procedure designed to exploit asymptotic group invariance conditions. Implementation of the test is intuitive and simple, and does not require any specification of a tuning parameter or weight function. At the same time, the test exhibits excellent finite sample performance, with the null rejection rates almost equal to the nominal level even when the sample size is extremely small. Two empirical applications concerning the dependence between income and consumption, and the Brexit effect on European financial market integration are provided.