Predicting the portfolio risk of high-dimensional international stock indices with dynamic spatial dependence

Guoli Mo, Weiguo Zhang, Chunzhi Tan and Xing Liu

The North American Journal of Economics and Finance, 2022, vol. 59, issue C

Abstract: The spatial dependence of assets, which relates to similarities in economic, political, or cultural systems and other aspects, has been confirmed through empirical research; however, spatial dependence has rarely been applied to financial risk measurement. To fill this gap in the literature, a dynamic spatial GARCH-copula (sGC) model is proposed in this paper to evaluate the portfolio risk of international stock indices. In this model, a spatial GARCH is used as the marginal distribution and vine copula is adopted as the joint distribution of indices. Then, the proposed model is applied empirically to assess portfolio risk. Results show that, first, the proposed risk prediction model with spatial dependence outperforms a model neglecting spatial effects per the Kupiec test, Z test and Christoffersen test. Risk prediction during periods of economic stability is also more accurate than during times of crisis. Second, risk measures for models with spatial dependence are higher than those without such dependence but lower than for vine copula models. Third, models including either spatial dependence or vine copulas alone exhibit relatively poor performance. Fourth, the model involving extreme value theory (EVT) generates the greatest value at risk to pass the Kupiec test, Z test and Christoffersen test; however, this model is not suitable for characterizing international indices with EVT based on negative values of the shape parameters of estimates. Findings offer important implications for personal investors, institutionalinvestors, and nationalregulatoryauthorities.

Keywords: Spatial dependence; International portfolio risk; Vine copulas; Tail dependence (search for similar items in EconPapers)
JEL-codes: F21 F37 G11 G15 (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecofin:v:59:y:2022:i:c:s1062940821001765

DOI: 10.1016/j.najef.2021.101570

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