Template-Type: ReDIF-Paper 1.0
Author-Name: Cathy Ning
Author-X-Name-First: Cathy
Author-X-Name-Last: Ning
Author-Email: qning@ryerson.ca 
Author-Workplace-Name: Department of Economics, Ryerson University, Toronto, Canada
Author-Name: Loran Chollete
Author-X-Name-First: Loran
Author-X-Name-Last: Chollete
Author-Email: loran.g.chollete@uis.no
Author-Workplace-Name: University of Stavanger, Stavanger, NO

Title: Asymmetric Dependence between Aggregate Consumption and Financial Risk
Abstract: When aggregate consumption and risk factors exhibit asymmetric dependence, diversification
becomes complicated and markets may face spillover risk between the
real and financial sector. Moreover, empirical analyses based on second moments
will not detect the true risk structure. We analyze dependence of US aggregate consumption
and risk factors, using copulas. Interestingly for research on spillovers, we
find evidence of downside dependence between consumption and industry risk, and
between consumption and market and size factors. We discover significant dynamics
in dependence between consumption and the size factor. Thus, consumption and
financial risk may exhibit time variation in downside risk. Our results provide quantitative
evidence on susceptibility of financial markets to diversification problems, and
on spillover risk between real and financial sectors.

Classification-JEL: C14, E21, E44, G01, G11
Keywords: Asymmetric Dependence; Aggregate Consumption; Diversification; Spillover Risk; Time-Varying Downside Risk  
Length: 34 pages
Creation-Date: 2012-10
Number: 046
File-URL: http://economics.ryerson.ca/workingpapers/wp046.pdf
File-Format: Application/pdf
Handle: RePEc:rye:wpaper:wp046