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Tail dependence and information flow: Evidence from international equity markets

Author

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  • Al Rahahleh, Naseem
  • Bhatti, M. Ishaq
  • Adeinat, Iman

Abstract

Bhatti and Nguyen (2012) used the copula approach to measure the tail dependence between a number of international markets. They observed that some country pairs exhibit only left-tail dependence whereas others show only right-tail. However, the flow of information from uni-dimensional (one-tail) to bi-dimensional (two-tails) between various markets was not accounted for. In this study, we address the flow of information of this nature by using the dynamic conditional correlation (DCC–GARCH) model. More specifically, we use various versions of the DCC models to explain the nexus between the information flow of international equity and to explain the stochastic forward vs. backward dynamics of financial markets based on data for a 15-year period comprising 3,782 observations. We observed that the information flow between the US and Hong Kong markets and between the US and Australian markets are bi-directional. We also observed that the DCC model captures a wider co-movement structure and inter-connectedness compared to the symmetric Joe–Clayton copula.

Suggested Citation

  • Al Rahahleh, Naseem & Bhatti, M. Ishaq & Adeinat, Iman, 2017. "Tail dependence and information flow: Evidence from international equity markets," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 474(C), pages 319-329.
  • Handle: RePEc:eee:phsmap:v:474:y:2017:i:c:p:319-329
    DOI: 10.1016/j.physa.2017.01.063
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    References listed on IDEAS

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    1. Guesmi, Khaled & Moisseron, Jean-Yves & Teulon, Frédéric, 2014. "Integration versus segmentation in Middle East North Africa Equity Market: Time variations and currency risk," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 28(C), pages 204-212.
    2. M. Shabri Abd. Majid & Ahamed Kameel Mydin Meera & Mohd. Azmi Omar, 2008. "Interdependence of ASEAN-5 Stock Markets from the US and Japan," Global Economic Review, Taylor & Francis Journals, vol. 37(2), pages 201-225.
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    5. Gregor Weiß, 2013. "Copula-GARCH versus dynamic conditional correlation: an empirical study on VaR and ES forecasting accuracy," Review of Quantitative Finance and Accounting, Springer, vol. 41(2), pages 179-202, August.
    6. Al Rahahleh, Naseem & Bhatti, M. Ishaq, 2017. "Co-movement measure of information transmission on international equity markets," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 470(C), pages 119-131.
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    Cited by:

    1. repec:kap:fmktpm:v:32:y:2018:i:2:d:10.1007_s11408-018-0308-5 is not listed on IDEAS
    2. repec:eee:ecmode:v:72:y:2018:i:c:p:249-259 is not listed on IDEAS

    More about this item

    Keywords

    DCC models; Copula; Equity market; Left-tail dependence; Spillover effect;

    JEL classification:

    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics

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