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A COAALA Copula for Stock-Bond Return Co-Movement: Beware of the Beast With Four Tails

The COAALA copula allows to analyse financial market stability by studying co-movement between stocks and government bonds using information on both the global and the four local tail dependence measures (i.e. dependence between severe movements). Such encompassing view on stock-bond co-movement has never been obtained convincingly before. Our contribution is twofold. First, we develop a novel copula function (COAALA) that is fully flexible. It accommodates the known features of stock-bond dependence, and also allows to study the responses of each asset to a severe move of the other asset, taking into account potential asymmetries in the likelihood of such responses. This copula comes with closed-form expressions of dependence measures without the computational deficiencies of alternative models. Second, for a set of countries with very similar global dependence, the COAALA unravels major differences in local dependences that hint at different stabilising abilities of bond markets across these countries.