Using Copulas To Study The Dependence Structure Between Bond And Stock In Chinese Listed Companies

Linkage effect among financial risks is a hot topic both in academics andpractitioners in recent years,in this context,this article focuses on the linkage effectbetween credit risk and market risk in Chinese financial markets,in order to examine theefficiency of the allocation of risk in Chinese financial markets.Taking into account thatthere may exist non-linear relationship between the two,we apply Copula function whichis a powerful statistical technique to study non-linear relationship to study the correlationstructure between the two.This study have certain reference value for our financial marketparticipants.We firstly introduce the concept and properties of Copula function,and study severalimportant correlation measure,after that we introduce3Archimedean Copulas which haveimportant applications in this paper in details,and then we research their feature ofcorrelation analysis in financial market.Finally,we introduce some methods for estimatingCopula parameters and selecting optimal Copula model.In empirical aspect,This paper conducts a Copula-based analysis of the dependencestructure between Chinese listed companies’bond yield spreads and stock return volatilityusing transaction data from47listed companies which had offered bond during the periodJan1,2010-Apr1,2011.Trying to find the evidence that there will exist linkage effectamong different risks in Chinese financial markets,but the results show that therelationship between the two is not definitive,we explain this phenomenon and give somepolicy suggestions.We also find that the relationship between the two in companies withlow credit rating tend to be positive,it indicates that there will exist more linkage effectamong risks in those companies.Lastly,we confirm that the Gumbel Copula is the bestfitting model to the transaction data.