Dependence Evolution in International Equity Markets

• Activity Number: 174
• Type: Contributed
• Date/Time: Monday, August 2, 2010 : 10:30 AM to 12:20 PM
• Sponsor: Business and Economic Statistics Section
• Author(s): Tatsuyoshi Okimoto*+
• Companies: Hitotsubashi University
• Keywords: Smooth transition model ; Copula ; GARCH ; Spearman's rho ; Tail dependence

Abstract

This paper investigates the dynamics of dependence in international equity markets. To this end, we develop a multiple-regime smooth-transition copula GARCH model and address several important questions including the number of regimes and the existence of asymmetry in dependence evolution. Our results indicate that two or three regimes are enough to describe dependence evolution in international equity markets over the last thirty-five years with a significant increase in both upper and lower tail dependences. Our results also suggest that accommodating the asymmetric dependence evolution is arguably important. In addition, the implied time-series of three dependence measures show a wide variety of dynamics, demonstrating usefulness of our framework to describe dynamics of dependence in international equity markets.