Analysis of the Tail Dependence Structure in the Global Markets: A Pair Copula Construction Approach

Marcelo Righi () and Paulo Ceretta ()
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Paulo Ceretta: Federal University of Santa Maria

Economics Bulletin, 2012, vol. 32, issue 2, 1151-1161

Abstract: In this paper we estimated pair copula constructions (PCC) for three sets of markets: developed, Latin emerging and Asia-Pacific emerging. To that, we used daily prices from January 2003 to November 2011, totaling 1872 observations. After, we estimated the lower and upper tail dependence for each bivariate relationship, comparing the three sets of markets. The results allow concluding that there are some discrepancies in the dependence of the lower and upper tails. The Asia-Pacific markets obtained the great general absolute and tail dependences. The results reinforced the need for a correct risk management in the case of international portfolios due to the fact that the tails generally represent extreme events, as crisis for example, which can lead to deep losses periods occasioned by eventual contagions caused by the tail dependence among the markets. Further, the diversification must be done properly, with optimization process that consider this dependence in the extreme values.

Keywords: Tail Dependence; Pair Copula Construction; Risk Management; Global Markets (search for similar items in EconPapers)
JEL-codes: C0 G0 (search for similar items in EconPapers)
Date: 2012-04-09
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Citations: View citations in EconPapers (1)

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