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Dependence Structure and Portfolio Diversification on Central European Stock Markets

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    Abstract

    This paper studies the dependence structure on Central European, German and UK stock markets within the framework of a semiparametric copula model for weekly stock index return pairs. Although the linear correlation is much lower, we find similar degree of lower tail dependence as between returns on stocks indices representing developed markets. We show in a simulation exercise that the implications of the estimated nonlinear dependencies for portfolio selection and risk management may be not only statisticaly but also economicaly important.

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    File URL: http://ies.fsv.cuni.cz/default/file/download/id/4962
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    Bibliographic Info

    Paper provided by Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies in its series Working Papers IES with number 2007/02.

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    Length: 23 pages
    Date of creation: Jan 2007
    Date of revision: Jan 2007
    Handle: RePEc:fau:wpaper:wp2007_02

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    Keywords: dependence structure; tail dependence; portfolio selection; risk measures;

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    1. Fortin, Ines & Kuzmics, Christoph, 2002. "Tail-Dependence in Stock-Return Pairs," Economics Series 126, Institute for Advanced Studies.
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