A New Asymmetric Copula with Reversible Correlations and Its Application to the EU Sovereign Debt Crisis

Abstract

This paper proposes a novel asymmetric copula based upon bivariate split normal distribution. This copula can change correlation signs of its upper and lower tails of distribution independently. As an application, it is shown by the rolling maximum likelihood estimation that the EU periphery countries changed sign of the lower tail correlation coefficient from negative to positive after the sovereign debt crisis started. In contrast, Germany had negative stock-bond correlation before and after the crisis.