Modelling Co-movements and Tail Dependency in the International Stock Market via Copulae

Katja Ignatieva and Eckhard Platen ()

No 265, Research Paper Series from Quantitative Finance Research Centre, University of Technology, Sydney

Abstract: This paper examines international equity market co-movements using time-varying copulae. We examine distributions from the class of Symmetric Generalized Hyperbolic (SGH) distributions for modelling univariate marginals of equity index returns. We show based on the goodness-of-fit testing that the SGH class outperforms the normal distribution, and that the Student-t assumption on marginals leads to the best performance, and thus, can be used to fit multivariate copula for the joint distribution of equity index returns. We show in our study that the Student-t copula is not only superior to the Gaussian copula, where the dependence structure relates to the multivariate normal distribution, but also out performs some alternative mixture copula models which allow to reflect asymmetric dependencies in the tails of the distribution. The Student-t copula with Student-t marginals allows to model realistically simultaneous co-movements and to capture tail dependency in the equity index returns. From the point of view of risk management, it is a good candidate for modelling the returns arising in an international equity index portfolio where the extreme losses are known to have a tendency to occur simultaneously. We apply copulae to the estimation of the Value-at-Risk and the Expected Shortfall, and show that the Student-t copula with Student-t marginals is superior to the alternative copula models investigated, as well the Riskmetics approach.

Keywords: international equity market indices; Student-t distribution; symmetric generalized hyperbolic distribution; time-varying copula; Value-at-Risk; world stock index (search for similar items in EconPapers)
JEL-codes: C13 C15 C16 C32 C52 (search for similar items in EconPapers)
Pages: 40 pages
Date: 2009-12-01
New Economics Papers: this item is included in nep-rmg
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Citations: View citations in EconPapers (2)

Published as: Ignatieva, K. and Platen, E., 2010, "Modelling Co-movements and Tail Dependency in the International Stock Market via Copulae", Asia-Pacific Financial Markets, 17(3), 261-302.

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https://www.uts.edu.au/sites/default/files/qfr-archive-03/QFR-rp265.pdf (application/pdf)

Related works:
Journal Article: Modelling Co-movements and Tail Dependency in the International Stock Market via Copulae (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:uts:rpaper:265

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