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Assessing dependence between financial market indexes using conditional time-varying copulas: applications to Value at Risk (VaR)

Author

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  • Osvaldo C. Silva Filho
  • Flavio A. Ziegelmann
  • Michael J. Dueker

Abstract

We analyse the dynamic dependence structure between broad stock market indexes from the United States (S&P500), Britain (FTSE100), Brazil (BOVESPA) and Mexico (PCMX). We employ Patton's [ Int. Econ. Rev ., 2006, 2 , 527-556] conditional copula setting and additionally observe the impact of different copula functions on Value at Risk (VaR) estimation. We conclude that the dependence between BOVESPA and the other indexes has intensified since the beginning of 2007. In our case the particular copula form is not crucial for VaR estimation. A goodness-of-fit test based on the parametric bootstrap is also applied. The best fits are obtained via time constant Student- t and time-varying Normal copulas.

Suggested Citation

  • Osvaldo C. Silva Filho & Flavio A. Ziegelmann & Michael J. Dueker, 2014. "Assessing dependence between financial market indexes using conditional time-varying copulas: applications to Value at Risk (VaR)," Quantitative Finance, Taylor & Francis Journals, vol. 14(12), pages 2155-2170, December.
    • Handle: RePEc:taf:quantf:v:14:y:2014:i:12:p:2155-2170
    DOI: 10.1080/14697688.2012.739726
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