Abstract
To better characterize the dependence structure of the joint returns distribution, we propose to blend copula functions with Asymmetric GARCH (AGARCH) models, which are allowed for generalized error distribution. We model the copula’s marginals by the AGARCH processes that can differentiate between the impacts of positive and negative shocks on the returns volatility while taking the large kurtosis of the returns into account. An application of the procedure is elaborated on the All Ordinaries Index and its corresponding Share Price Index on future contracts in Australia. The findings reveal that the two spot and future markets show a strong right tail dependence but no left tail dependence. This provides a very useful knowledge for the risk management and hedging in futures markets.
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Nguyen, C., Bhatti, M.I. & Hayat, A. Volatility linkages in the spot and futures market in Australia: a copula approach. Qual Quant 48, 2589–2603 (2014). https://doi.org/10.1007/s11135-013-9909-2
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DOI: https://doi.org/10.1007/s11135-013-9909-2