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Analysing financial contagion and asymmetric market dependence with volatility indices via copulas

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Abstract

This paper explores the cross-market dependence between five popular equity indices (S&P 500, NASDAQ 100, DAX 30, FTSE 100, and Nikkei 225), and their corresponding volatility indices (VIX, VXN, VDAX, VFTSE, and VXJ). In particular, we propose a dynamic mixed copula approach which is able to capture the time-varying tail dependence coefficient (TDC). The findings indicate the existence of financial contagion and significant asymmetric TDCs for major international equity markets. In some situations, although contagion cannot be clearly detected by stock index movements, it can be captured by dependence between volatility indices. The results imply that contagion is not only reflected in the first moment of index returns, but also the second moment, i.e. the volatility. Results also show that dependence between volatility indices is more easily influenced by financial shocks and reflects the instantaneous information faster than the stock market indices.

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Authors and Affiliations

  1. Centre for Computational Finance and Economic Agents, University of Essex, Wivenhoe Park, Colchester, CO4 3SQ, Essex, UK

    Yue Peng & Wing Lon Ng

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  1. Yue Peng
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  2. Wing Lon Ng
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Correspondence to Wing Lon Ng.

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Peng, Y., Ng, W.L. Analysing financial contagion and asymmetric market dependence with volatility indices via copulas. Ann Finance 8, 49–74 (2012). https://doi.org/10.1007/s10436-011-0181-y

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