Empirical Economics

, 36:201 | Cite as

A new approach to modeling co-movement of international equity markets: evidence of unconditional copula-based simulation of tail dependence

  • Wei Sun
  • Svetlozar Rachev
  • Frank J. Fabozzi
  • Petko S. Kalev
Original Paper

Abstract

Analyzing equity market co-movements is important for risk diversification of an international portfolio. Copulas have several advantages compared to the linear correlation measure in modeling co-movement. This paper introduces a copula ARMA-GARCH model for analyzing the co-movement of international equity markets. The model is implemented with an ARMA-GARCH model for the marginal distributions and a copula for the joint distribution. After goodness of fit testing, we find that the Student’s t copula ARMA(1,1)-GARCH(1,1) model with fractional Gaussian noise is superior to alternative models investigated in our study where we model the simultaneous co-movement of nine international equity market indexes. This model is also suitable for capturing the long-range dependence and tail dependence observed in international equity markets.

Keywords

Copula Fractional Gaussian noise High-frequency data Self-similarity Tail dependence 

JEL Classification

C15 C46 C52 G15 

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Copyright information

© Springer-Verlag 2008

Authors and Affiliations

  • Wei Sun
    • 1
  • Svetlozar Rachev
    • 1
    • 2
  • Frank J. Fabozzi
    • 3
  • Petko S. Kalev
    • 4
  1. 1.Institute for Statistics and Mathematical EconomicsUniversity of Karlsruhe, Karlsruhe Institute of TechnologyKarlsruheGermany
  2. 2.Department of Statistics and Applied ProbabilityUniversity of CaliforniaSanta BarbaraUSA
  3. 3.Yale School of ManagementNew HavenUSA
  4. 4.Department of Accounting and FinanceMonash UniversityMelbourneAustralia

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