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Regime Switching Vine Copula Models for Global Equity and Volatility Indices

Holger Fink (), Yulia Klimova (), Claudia Czado () and Jakob Stöber ()
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Holger Fink: Faculty Business Administration and International Finance, Nürtingen-Geislingen University, Sigmaringer Strasse 14, 72622 Nürtingen, Germany
Yulia Klimova: Department of Mathematics, Technische Universität München, Boltzmannstraße 3, 85748 Garching, Germany
Claudia Czado: Department of Mathematics, Technische Universität München, Boltzmannstraße 3, 85748 Garching, Germany
Jakob Stöber: Department of Mathematics, Technische Universität München, Boltzmannstraße 3, 85748 Garching, Germany

Econometrics, 2017, vol. 5, issue 1, 1-38

Abstract: For nearly every major stock market there exist equity and implied volatility indices. These play important roles within finance: be it as a benchmark, a measure of general uncertainty or a way of investing or hedging. It is well known in the academic literature that correlations and higher moments between different indices tend to vary in time. However, to the best of our knowledge, no one has yet considered a global setup including both equity and implied volatility indices of various continents, and allowing for a changing dependence structure. We aim to close this gap by applying Markov-switching R -vine models to investigate the existence of different, global dependence regimes. In particular, we identify times of “normal” and “abnormal” states within a data set consisting of North-American, European and Asian indices. Our results confirm the existence of joint points in a time at which global regime switching between two different R -vine structures takes place.

Keywords: regular vine copulas; Markov switching; implied volatility index; equity index; global dependence regimes (search for similar items in EconPapers)
JEL-codes: B23 C C00 C01 C1 C2 C3 C4 C5 C8 (search for similar items in EconPapers)
Date: 2017
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