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Asymmetric Increasing Trends in Dependence in International Equity Markets

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  • Tatsuyoshi Okimoto
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    Abstract

    This paper investigates asymmetric increasing trends in dependence in major international equity markets. To this end, we develop a multiple-regime smooth-transition copula GARCH model and address several important questions, including the number of regimes and the existence of increasing asymmetric trends in dependence. Our results suggest that two or three regimes are sufficient for describing the dependence trends in international equity markets over the last 35 years with significant asymmetric increases. In addition, the implied time-series of three dependence measures show a wide variety of dynamics, demonstrating the usefulness of our framework to describe asymmetric increasing dependence trends. Finally, we evaluate the economic significance of our empirical finding based on the 99% value at risk and expected shortfall. Our result indicates that both risk measures have increased approximately 20% over the last 35 years in major equity markets.

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    File URL: https://cama.crawford.anu.edu.au/sites/default/files/publication/cama_crawford_anu_edu_au/2014-05/44_2014_okimoto.pdf
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    Bibliographic Info

    Paper provided by Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University in its series CAMA Working Papers with number 2014-44.

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    Length: 38 pages
    Date of creation: May 2014
    Date of revision:
    Handle: RePEc:een:camaaa:2014-44

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    Keywords: Smooth transition model; Copula; Spearman's rho; Tail dependence;

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    12. Kumar, Manmohan S. & Okimoto, Tatsuyoshi, 2011. "Dynamics of international integration of government securities' markets," Journal of Banking & Finance, Elsevier, vol. 35(1), pages 142-154, January.
    13. Okimoto, Tatsuyoshi, 2008. "New Evidence of Asymmetric Dependence Structures in International Equity Markets," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 43(03), pages 787-815, September.
    14. Andrew Patton, 2004. "Modelling Asymmetric Exchange Rate Dependence," Working Papers wp04-04, Warwick Business School, Finance Group.
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