Asymmetric Increasing Trends in Dependence in International Equity Markets
AbstractThis 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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Bibliographic InfoPaper 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.
Length: 38 pages
Date of creation: May 2014
Date of revision:
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Smooth transition model; Copula; Spearman's rho; Tail dependence;
Find related papers by JEL classification:
- C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
- C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
- G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
This paper has been announced in the following NEP Reports:
- NEP-ALL-2014-06-02 (All new papers)
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