IDEAS home Printed from https://ideas.repec.org/a/ibn/ijefaa/v9y2017i10p155-178.html
   My bibliography  Save this article

A Comparison Study of Copula Models for Europea Financial Index Returns

Author

Listed:
  • Paula V. Tofoli
  • Flavio A. Ziegelmann
  • Osvaldo Candido

Abstract

In this paper, we introduce a new approach to modeling dependence between international financial returns over time, combining time-varying copulas and the Markov switching model. We apply these copula models and also those proposed by Patton (2006), Jondeau and Rockinger (2006) and Silva Filho, Ziegelmann, and Dueker (2012) to the return data of the FTSE-100, CAC-40 and DAX indexes. We are particularly interested in comparing these methodologies in terms of the resulting dynamics of dependence and the models¡¯ abilities to forecast possible capital losses. Because risks related to extreme events are important for risk management, we compare and select the models based on VaR forecasts. Interestingly, all the models identify a long period of high dependence between the returns beginning in 2007, when the subprime crisis was evolving. Surprisingly, the elliptical copulas perform best in forecasting the extreme quantiles of the portfolios returns.

Suggested Citation

  • Paula V. Tofoli & Flavio A. Ziegelmann & Osvaldo Candido, 2017. "A Comparison Study of Copula Models for Europea Financial Index Returns," International Journal of Economics and Finance, Canadian Center of Science and Education, vol. 9(10), pages 155-178, October.
    • Handle: RePEc:ibn:ijefaa:v:9:y:2017:i:10:p:155-178
    as

    Download full text from publisher

    File URL: http://ccsenet.org/journal/index.php/ijef/article/view/70527/38434
    Download Restriction: no
    File URL: http://ccsenet.org/journal/index.php/ijef/article/view/70527
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Andrew Ang & Geert Bekaert, 2002. "International Asset Allocation With Regime Shifts," The Review of Financial Studies, Society for Financial Studies, vol. 15(4), pages 1137-1187.
    2. Christoffersen, Peter F, 1998. "Evaluating Interval Forecasts," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(4), pages 841-862, November.
    3. Hamilton, James D, 1989. "A New Approach to the Economic Analysis of Nonstationary Time Series and the Business Cycle," Econometrica, Econometric Society, vol. 57(2), pages 357-384, March.
    4. Stöber, Jakob & Czado, Claudia, 2014. "Regime switches in the dependence structure of multidimensional financial data," Computational Statistics & Data Analysis, Elsevier, vol. 76(C), pages 672-686.
    5. Peter Christoffersen & Vihang Errunza & Kris Jacobs & Hugues Langlois, 2012. "Is the Potential for International Diversification Disappearing? A Dynamic Copula Approach," Review of Financial Studies, Society for Financial Studies, vol. 25(12), pages 3711-3751.
    6. A. Sancetta & Satchell, S.E., 2001. "Bernstein Approximations to the Copula Function and Portfolio Optimization," Cambridge Working Papers in Economics 0105, Faculty of Economics, University of Cambridge.
    7. Silva Filho, Osvaldo Candido da & Ziegelmann, Flavio Augusto & Dueker, Michael J., 2012. "Modeling dependence dynamics through copulas with regime switching," Insurance: Mathematics and Economics, Elsevier, vol. 50(3), pages 346-356.
    8. Hansen, Peter Reinhard, 2005. "A Test for Superior Predictive Ability," Journal of Business & Economic Statistics, American Statistical Association, vol. 23, pages 365-380, October.
    9. Paul H. Kupiec, 1995. "Techniques for verifying the accuracy of risk measurement models," Finance and Economics Discussion Series 95-24, Board of Governors of the Federal Reserve System (U.S.).
    10. Fei, Fei & Fuertes, Ana-Maria & Kalotychou, Elena, 2017. "Dependence in credit default swap and equity markets: Dynamic copula with Markov-switching," International Journal of Forecasting, Elsevier, vol. 33(3), pages 662-678.
    11. Okimoto, Tatsuyoshi, 2008. "New Evidence of Asymmetric Dependence Structures in International Equity Markets," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 43(3), pages 787-815, September.
    12. Andrew J. Patton, 2006. "Modelling Asymmetric Exchange Rate Dependence," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 47(2), pages 527-556, May.
    13. Støve, Bård & Tjøstheim, Dag & Hufthammer, Karl Ove, 2014. "Using local Gaussian correlation in a nonlinear re-examination of financial contagion," Journal of Empirical Finance, Elsevier, vol. 25(C), pages 62-82.
    14. Campbell, Rachel A.J. & Forbes, Catherine S. & Koedijk, Kees G. & Kofman, Paul, 2008. "Increasing correlations or just fat tails?," Journal of Empirical Finance, Elsevier, vol. 15(2), pages 287-309, March.
    15. François Longin & Bruno Solnik, 2001. "Extreme Correlation of International Equity Markets," Journal of Finance, American Finance Association, vol. 56(2), pages 649-676, April.
    16. Jondeau, Eric & Rockinger, Michael, 2006. "The Copula-GARCH model of conditional dependencies: An international stock market application," Journal of International Money and Finance, Elsevier, vol. 25(5), pages 827-853, August.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. BenSaïda, Ahmed, 2018. "The contagion effect in European sovereign debt markets: A regime-switching vine copula approach," International Review of Financial Analysis, Elsevier, vol. 58(C), pages 153-165.
    2. Cerrato, Mario & Crosby, John & Kim, Minjoo & Zhao, Yang, 2015. "US Monetary and Fiscal Policies - Conflict or Cooperation?," SIRE Discussion Papers 2015-78, Scottish Institute for Research in Economics (SIRE).
    3. Cerrato, Mario & Crosby, John & Kim, Minjoo & Zhao, Yang, 2015. "US Monetary and Fiscal Policies - Conflict or Cooperation?," 2007 Annual Meeting, July 29-August 1, 2007, Portland, Oregon TN 2015-78, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    4. Mario Cerrato & John Crosby & Minjoo Kim & Yang Zhao, 2015. "Modeling Dependence Structure and Forecasting Market Risk with Dynamic Asymmetric Copula," Working Papers 2015_15, Business School - Economics, University of Glasgow.
    5. Tófoli Paula V. & Ziegelmann Flávio A. & Candido Osvaldo & Valls Pereira Pedro L., 2019. "Dynamic D-Vine Copula Model with Applications to Value-at-Risk (VaR)," Journal of Time Series Econometrics, De Gruyter, vol. 11(2), pages 1-34, July.
    6. Aepli, Matthias D. & Füss, Roland & Henriksen, Tom Erik S. & Paraschiv, Florentina, 2017. "Modeling the multivariate dynamic dependence structure of commodity futures portfolios," Journal of Commodity Markets, Elsevier, vol. 6(C), pages 66-87.
    7. Fei, Fei & Fuertes, Ana-Maria & Kalotychou, Elena, 2017. "Dependence in credit default swap and equity markets: Dynamic copula with Markov-switching," International Journal of Forecasting, Elsevier, vol. 33(3), pages 662-678.
    8. Tachibana, Minoru, 2022. "Safe haven assets for international stock markets: A regime-switching factor copula approach," Research in International Business and Finance, Elsevier, vol. 60(C).
    9. Lorán Chollete & Andréas Heinen & Alfonso Valdesogo, 2009. "Modeling International Financial Returns with a Multivariate Regime-switching Copula," Journal of Financial Econometrics, Oxford University Press, vol. 7(4), pages 437-480, Fall.
    10. Cerrato, Mario & Crosby, John & Kim, Minjoo & Zhao, Yang, 2014. "Modeling Dependence Structure and Forecasting Portfolio Value-at-Risk with Dynamic Copulas," SIRE Discussion Papers 2015-25, Scottish Institute for Research in Economics (SIRE).
    11. Chang, Kuang-Liang, 2023. "The low-magnitude and high-magnitude asymmetries in tail dependence structures in international equity markets and the role of bilateral exchange rate," Journal of International Money and Finance, Elsevier, vol. 133(C).
    12. Tong, Bin & Diao, Xundi & Wu, Chongfeng, 2015. "Modeling asymmetric and dynamic dependence of overnight and daytime returns: An empirical evidence from China Banking Sector," Economic Modelling, Elsevier, vol. 51(C), pages 366-382.
    13. Udichibarna Bose & Ronald MacDonald & Serafeim Tsoukas, 2014. "The role of education in equity portfolios during the recent financial crisis," Working Papers 2014_17, Business School - Economics, University of Glasgow.
    14. Su, Xiaoshan & Bai, Manying & Han, Yingwei, 2021. "Robust portfolio selection with regime switching and asymmetric dependence," Economic Modelling, Elsevier, vol. 99(C).
    15. Rajan Sruthi & Santhakumar Shijin, 2020. "Investigating liquidity constraints as a channel of contagion: a regime switching approach," Financial Innovation, Springer;Southwestern University of Finance and Economics, vol. 6(1), pages 1-21, December.
    16. Cerrato, Mario & Crosby, John & Kim, Minjoo & Zhao, Yang, 2014. "Modeling Dependence Structure and Forecasting Portfolio Value-at-Risk with Dynamic Copulas," 2007 Annual Meeting, July 29-August 1, 2007, Portland, Oregon TN 2015-25, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    17. Chen, Yi-Hsuan & Tu, Anthony H., 2013. "Estimating hedged portfolio value-at-risk using the conditional copula: An illustration of model risk," International Review of Economics & Finance, Elsevier, vol. 27(C), pages 514-528.
    18. Jin Xisong & Lehnert Thorsten, 2018. "Large portfolio risk management and optimal portfolio allocation with dynamic elliptical copulas," Dependence Modeling, De Gruyter, vol. 6(1), pages 19-46, February.
    19. Henryk Gurgul & Robert Syrek, 2010. "Polish stock market and some foreign markets - dependence analysis by regime-switching copulas," Managerial Economics, AGH University of Science and Technology, Faculty of Management, vol. 8, pages 21-39.
    20. De Lira Salvatierra, Irving & Patton, Andrew J., 2015. "Dynamic copula models and high frequency data," Journal of Empirical Finance, Elsevier, vol. 30(C), pages 120-135.

    More about this item

    Keywords

    copula-GARCH; IFM method; Markov switching model; time-varying copulas; value at risk;
    All these keywords.

    JEL classification:

    • R00 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General - - - General
    • Z0 - Other Special Topics - - General

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ibn:ijefaa:v:9:y:2017:i:10:p:155-178. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Canadian Center of Science and Education (email available below). General contact details of provider: https://edirc.repec.org/data/cepflch.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.