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Analysis of the Tail Dependence Structure in the Global Markets: A Pair Copula Construction Approach

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  • Marcelo Brutti Righi

    ()
    (Federal University of Santa Maria)

  • Paulo Sergio Ceretta

    ()
    (Federal University of Santa Maria)

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    Abstract

    In this paper we estimated pair copula constructions (PCC) for three sets of markets: developed, Latin emerging and Asia-Pacific emerging. To that, we used daily prices from January 2003 to November 2011, totaling 1872 observations. After, we estimated the lower and upper tail dependence for each bivariate relationship, comparing the three sets of markets. The results allow concluding that there are some discrepancies in the dependence of the lower and upper tails. The Asia-Pacific markets obtained the great general absolute and tail dependences. The results reinforced the need for a correct risk management in the case of international portfolios due to the fact that the tails generally represent extreme events, as crisis for example, which can lead to deep losses periods occasioned by eventual contagions caused by the tail dependence among the markets. Further, the diversification must be done properly, with optimization process that consider this dependence in the extreme values.

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    Bibliographic Info

    Article provided by AccessEcon in its journal Economics Bulletin.

    Volume (Year): 32 (2012)
    Issue (Month): 2 ()
    Pages: 1151-1161

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    Handle: RePEc:ebl:ecbull:eb-12-00052

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    Related research

    Keywords: Tail Dependence; Pair Copula Construction; Risk Management; Global Markets;

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    1. repec:sae:ecolab:v:16:y:2006:i:2:p:1-2 is not listed on IDEAS
    2. Genest, Christian & RĂ©millard, 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.
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    Cited by:
    1. Paulo Sergio Ceretta & Marcelo Brutti Righi & Alexandre Silva Da costa & Fernanda Maria Muller, 2012. "Quantiles autocorrelation in stock markets returns," Economics Bulletin, AccessEcon, vol. 32(3), pages 2065-2075.

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