Analyzing the dependence structure of various sectors in the Brazilian market: A Pair Copula Construction approach

Marcelo Righi () and Paulo Sergio Ceretta

Economic Modelling, 2013, vol. 35, issue C, 199-206

Abstract: In this paper we estimate the dependence structure between economic sectors in the Brazilian financial market through Pair Copula Construction. We use daily data from indices which represent telecommunications, energy, industrials, consumer, financial, basic materials and real estate sectors in BM&F/Bovespa. Results indicate predominance of student's t copula in structure. BB1, BB7, BB8, Frank and Joe copulas also fit into some relationships. Regarding dependence, tail measures obtain relevant values in most relationships. Lower tail dependence exceeds absolute, measured by Kendall's Tau, and upper tail in many cases, reflecting the asymmetry in some relationships. Further, in order to give robustness to these results, we forecast daily Value at Risk, considering distinct significance levels, of a portfolio composed of studied sectors through the estimated structure. Results allow one to conclude that VaR predictions are correct. These results permit business industry participants to construct portfolios with assets of these sectors under a proper diversification structure. Moreover, from an international point of view, investors who are interested in diversification could perform more sophisticated strategies in this country rather than simply trading the index.

Keywords: Dependence; Risk management; Pair Copula Construction; Sectors; Brazilian market (search for similar items in EconPapers)
JEL-codes: C00 C5 G2 (search for similar items in EconPapers)
Date: 2013
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:35:y:2013:i:c:p:199-206

DOI: 10.1016/j.econmod.2013.06.012

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