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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.

Suggested Citation

  • Filip Žikeš, 2007. "Dependence Structure and Portfolio Diversification on Central European Stock Markets," Working Papers IES 2007/02, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies, revised Jan 2007.
  • Handle: RePEc:fau:wpaper:wp2007_02
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    File URL: http://ies.fsv.cuni.cz/default/file/download/id/4962
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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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    Keywords

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

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • C46 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Specific Distributions

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