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The study on the tail dependence structure between the economic policy uncertainty and several financial markets

Can-Zhong Yao and Bo-Yi Sun

The North American Journal of Economics and Finance, 2018, vol. 45, issue C, 245-265

Abstract: The paper firstly studies the static tail dependence structure between the economic policy uncertainty (EPU) index and several financial markets (Brent Oil, CDS, VIX, SP500 and UK EPU) with Copula models. The results show significant negative upper tail dependence between the EPU index and the SP500 index in most years, but also show positive upper tail dependence during the 2016 period. Further, the negative tail dependence area between EPU and CDS also demonstrates that higher economic policy uncertainty may reduce real risk premium. Finally, based on Markov time-varying Copula functions, the dynamic time-varying structures between the EPU index and indexes including SP500, CDS, VIX and UK EPU indexes are studied. The significant regime switching characteristic is shown between the EPU index and the UK EPU index.

Keywords: Tail dependence; Time-varying Copula; EPU; CDS (search for similar items in EconPapers)
Date: 2018
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecofin:v:45:y:2018:i:c:p:245-265

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