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Assessing dependence changes using nonparametric methods

Param Silvapulle () and Xibin Zhang ()

Applied Financial Economics Letters, 2007, vol. 3, issue 6, 397-401

Abstract: This article examines the change in the dependence between two emerging equity markets (Korean and Thai) returns due to July 1997-financial crisis. The nonparametric chi- and K-plots reveal that these two markets were largely independent before the crisis and became significantly dependent in the post-crisis period. These results indicate that the benefit of international portfolio diversification would be eroded after these emerging markets experience major crises. Further, we find that the dependence in the post-crisis period can be captures by the Gumbel copula. The chi- and K-plots can be used as a guide to choosing a suitable copula before embarking on parametric modelling and estimating exercise.

Date: 2007
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