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Extreme values dependence of risk in Latin American markets

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  • Marcelo Brutti Righi

    ()
    (Universidade Federal de Santa Maria)

  • Paulo Sergio Ceretta

    ()
    (Universidade Federal de Santa Maria)

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    Abstract

    This paper aims to determine which extreme value copula is best suited to the bivariate relationships between shocks of U.S market with Brazilian, Argentine and Mexican markets. We used prices of S&P500, Ibovespa, Merval and IPC from January, 3, 2009 to December, 31, 2010, totaling 483 observations. We estimated Gumbel, Galambos, Husler Reiss and Student's t (extreme-value - TEV) copulas. Results allow concluding that there is a strong dependence on the tails of the joint probability distribution of these markets. Nevertheless, the Gumbel copula for Brazil, Husler-Reiss copula for Argentina and TEV copula for Mexico had the best fit. Thus, its important use an extreme value properly diversify the risk in a portfolio that consist of assets in these countries, especially in turbulence periods.

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    Bibliographic Info

    Article provided by AccessEcon in its journal Economics Bulletin.

    Volume (Year): 31 (2011)
    Issue (Month): 4 ()
    Pages: 2903-2914

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    Handle: RePEc:ebl:ecbull:eb-11-00437

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    Related research

    Keywords: Risk; Extreme values; copulas; Transmission; Emerging markets;

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    1. Massimiliano Caporin & Michael McAleer, 2012. "Do We Really Need Both Bekk And Dcc? A Tale Of Two Multivariate Garch Models," Journal of Economic Surveys, Wiley Blackwell, vol. 26(4), pages 736-751, 09.
    2. Kee-Hong Bae & G. Andrew Karolyi & René M. Stulz, 2003. "A New Approach to Measuring Financial Contagion," Review of Financial Studies, Society for Financial Studies, vol. 16(3), pages 717-763, July.
    3. Genest, Christian & Rémillard, Bruno & Beaudoin, David, 2009. "Goodness-of-fit tests for copulas: A review and a power study," Insurance: Mathematics and Economics, Elsevier, vol. 44(2), pages 199-213, April.
    4. William F. Sharpe, 1964. "Capital Asset Prices: A Theory Of Market Equilibrium Under Conditions Of Risk," Journal of Finance, American Finance Association, vol. 19(3), pages 425-442, 09.
    5. François Longin, 2001. "Extreme Correlation of International Equity Markets," Journal of Finance, American Finance Association, vol. 56(2), pages 649-676, 04.
    6. Harry Markowitz, 1952. "Portfolio Selection," Journal of Finance, American Finance Association, vol. 7(1), pages 77-91, 03.
    7. repec:sae:ecolab:v:16:y:2006:i:2:p:1-2 is not listed on IDEAS
    8. Ivan Kojadinovic & Jun Yan, . "Modeling Multivariate Distributions with Continuous Margins Using the copula R Package," Journal of Statistical Software, American Statistical Association, vol. 34(i09).
    9. Dickey, David A & Fuller, Wayne A, 1981. "Likelihood Ratio Statistics for Autoregressive Time Series with a Unit Root," Econometrica, Econometric Society, vol. 49(4), pages 1057-72, June.
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