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The dependence structure between Chinese and other major stock markets using extreme values and copulas

Saiful Izzuan Hussain and Steven Li

International Review of Economics & Finance, 2018, vol. 56, issue C, 421-437

Abstract: This study employs the extreme value theory (EVT) and stochastic copulas to investigate the dependence structure between the Chinese stock market and other major stock markets including the US, Canada, UK, Germany, Japan and Australia. Our research reveals that the dependence between the Chinese stock market and the developed markets is low. Furthermore, our study indicates Chinese stock market has stronger dependence with Asia and Europe than the US. Among all 6 pairs, the dependence between Chinese and US stock markets is the lowest and that between China and Australia is the highest. It is also found that US and UK do not have significant upper tail dependence with Chinese stock market and the dependence between China and Japan is strong but has weakened for the lower tail since 2014. Overall, diversification across all six pairs of stock markets is not effective, though the prospect of diversification across China and Japan has improved.

Keywords: Copula; Extreme value theory; Dependence structure; Chinese stock market (search for similar items in EconPapers)
Date: 2018
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Handle: RePEc:eee:reveco:v:56:y:2018:i:c:p:421-437