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Risk Spillover between the US and the Remaining G7 Stock Markets Using Time-Varying Copulas with Markov Switching: Evidence from Over a Century of Data

Qiang Ji (), Bing-Yue Liu (), Juncal Cunado () and Rangan Gupta ()
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Qiang Ji: Center for Energy and Environmental Policy research, Institutes of Science and Development, Chinese Academy of Sciences and School of Public Policy and Management, University of Chinese Academy of Sciences, Beijing, China
Bing-Yue Liu: Center for Energy and Environmental Policy research, Institutes of Science and Development, Chinese Academy of Sciences and Department of Statistics and Finance, University of Science and Technology of China, Hefei, China
Juncal Cunado: University of Navarra, School of Economics, Edificio Amigos, E-31080 Pamplona, Spain

No 201759, Working Papers from University of Pretoria, Department of Economics

Abstract: This paper analyses the risk spillover effect between the US stock market and the remaining G7 stock markets by measuring the conditional Value-at-Risk (CoVaR) using time-varying copula models with Markov switching and data that covers more than 100 years. The main results suggest that the dependence structure varies with time and has distinct high and low dependence regimes. Our findings verify the existence of risk spillover between the US stock market and the remaining G7 stock markets. Furthermore, the results imply the following: 1) abnormal spikes of dynamic CoVaR were induced by well-known historical economic shocks; 2) The value of upside risk spillover is significantly larger than the downside risk spillover and 3) The magnitudes of risk spillover from the remaining G7 countries to the US are significantly larger than that from the US to these countries.

Keywords: Time-varying copula; Markov switching; CoVaR; risk spillover; G7 stock markets (search for similar items in EconPapers)
JEL-codes: C21 G32 G38 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cfn, nep-his and nep-rmg
Date: 2017-08
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