The low-magnitude and high-magnitude asymmetries in tail dependence structures in international equity markets and the role of bilateral exchange rate

Kuang-Liang Chang

Journal of International Money and Finance, 2023, vol. 133, issue C

Abstract: This paper introduces a new Markov-switching mixture copula model with a GAS mechanism in the weighting process to investigate the structures of the upper-tail dependence and lower-tail dependence in a low-magnitude asymmetry state and a high-magnitude asymmetry state for international equity markets. Three important findings arise. First, there are obvious low-magnitude and high-magnitude asymmetries in the tail dependence between equity markets of the U.S. and four nations (Canada, France, Germany, and the U.K.). Second, the difference between the upper-tail dependence and lower-tail dependence increases substantially around after 2000. In general, the importance of the lower-tail dependence is stronger than that of the upper-tail dependence in the high-magnitude asymmetry state. However, the Brexit panic does not change the importance of the tail dependence for the U.S. and European equity markets. Third, the evidence for the impact of the bilateral exchange rate on the tail dependence appears only for some international equity markets during the period of a high-magnitude asymmetry state. The bilateral exchange rate has a significant asymmetric impact on the upper-tail dependence and lower-tail dependence for the U.S. and Canadian equity markets. There is weak evidence of an asymmetric effect of the bilateral exchange rate for the U.S. and U.K. equity markets.

Keywords: Markov-switching; Mixture copula; GAS; Equity market; Exchange rate (search for similar items in EconPapers)
JEL-codes: C32 C58 F31 G15 (search for similar items in EconPapers)
Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jimfin:v:133:y:2023:i:c:s0261560623000402

DOI: 10.1016/j.jimonfin.2023.102839

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