Stability of cross-market bivariate return distributions during financial turbulence

Abstract

The paper examines the stability of the bivariate stock return distributions across the G5 and five emerging markets in times of financial crisis using copula models. We find that the volatility dynamics as well as the dependency structures appear to be both country- and period-specific. Neither the bivariate distributions nor the associated parameters appear to be stable over time. It implies that the usefulness of the copula techniques may be limited particularly in times of financial turbulence. Our results strike a note of caution for the practitioners and policy makers in dealing with the phenomenon of financialization which draws much strength from the quantitative financial models.