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Dependence patterns across financial markets: a mixed copula approach

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  • Ling Hu
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    Abstract

    This paper studies the modelling and estimation of dependence across international financial markets, with a focus on the structure of dependence. A new approach is proposed based on a mixed copula model and the model is constructed so that it can capture various patterns of dependence structures. The marginal distribution of asset returns in each market is estimated non-parametrically and a quasi-ML method is used to estimate the mixed copula. The methodology is applied to estimate the dependence across several international stock markets. The empirical findings are shown to have some implications that are important for a wide range of multivariate studies in Economics and Finance.

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    File URL: http://www.tandfonline.com/doi/abs/10.1080/09603100500426515
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    Article provided by Taylor & Francis Journals in its journal Applied Financial Economics.

    Volume (Year): 16 (2006)
    Issue (Month): 10 ()
    Pages: 717-729

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    Handle: RePEc:taf:apfiec:v:16:y:2006:i:10:p:717-729
    DOI: 10.1080/09603100500426515
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    1. Giancarlo Corsetti & Luca Dedola & Sylvain Leduc, 2008. "International Risk Sharing and the Transmission of Productivity Shocks," Review of Economic Studies, Oxford University Press, vol. 75(2), pages 443-473.
    2. Chen, Joseph & Hong, Harrison & Stein, Jeremy C., 2001. "Forecasting crashes: trading volume, past returns, and conditional skewness in stock prices," Journal of Financial Economics, Elsevier, vol. 61(3), pages 345-381, September.
    3. Sunil Sharma & Sushil Bikhchandani, 2000. "Herd Behavior in Financial Markets; A Review," IMF Working Papers 00/48, International Monetary Fund.
    4. Tilak Abeysinghe & Kristin Forbes, 2005. "Trade Linkages and Output-Multiplier Effects: a Structural VAR Approach with a Focus on Asia," Review of International Economics, Wiley Blackwell, vol. 13(2), pages 356-375, 05.
    5. Allan Drazen, 2000. "Political Contagion in Currency Crises," NBER Chapters,in: Currency Crises, pages 47-67 National Bureau of Economic Research, Inc.
    6. Bouye, Eric & Durlleman, Valdo & Nikeghbali, Ashkan & Riboulet, Gaël & Roncalli, Thierry, 2000. "Copulas for finance," MPRA Paper 37359, University Library of Munich, Germany.
    7. Forbes, Kristin J. & Abeysinghe, Tilak, 2002. "Trade Linkages and Output-Multiplier Effects: A Structural VAR," Working papers 4242-01, Massachusetts Institute of Technology (MIT), Sloan School of Management.
    8. King, Mervyn & Sentana, Enrique & Wadhwani, Sushil, 1994. "Volatility and Links between National Stock Markets," Econometrica, Econometric Society, vol. 62(4), pages 901-933, July.
    9. Franklin Allen & Douglas Gale, 1998. "Financial Contagion Journal of Political Economy," Center for Financial Institutions Working Papers 98-31, Wharton School Center for Financial Institutions, University of Pennsylvania.
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