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

Yue, Peng; Ng, Wing Lon

doi:10.1007/s10436-011-0181-y

Cited by 77 publications

(36 citation statements)

References 58 publications

(74 reference statements)

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“…Patton (2006b) also finds asymmetric dependence between the Deutschemark and the yen. Jondeau et al (2007), Peng and Ng (2012) finds evidence of financial contagion and asymmetric tail dependence coefficient between the major international stock markets. Recently, Reboredo (2013) finds evidence of symmetric tail dependence between gold and USD exchange rates.…”

Section: Copula Models For Bivariate Distributionsmentioning

confidence: 99%

Dependence Patterns Among Banking Sectors in Asia: A Copula Approach

Mensah¹,

Premaratne

2014

SSRN Journal

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The bitter experience of the subprime crisis of 2007, the Global Financial crisis of 2008, and the extremely slow and painful ensuing recovery, has raised systemic risk to the center stage of global economic discourses. The crisis has brought home the urgent need for a thorough assessment of the dependence and interaction between banking sectors, from which most of the trouble began. This study investigates patterns and trends in absolute and tail dependence over time using daily returns for banking sectors from 12 Asian economies during the period 2000-2012. Static and time-varying Copula models, Gaussian copula, Symmetrized Joe-Clayton copulas, are employed to study the tail co-movements among the selected markets. The paper assumes a skew-t distribution for the innovation process of the marginal models. The results of the marginal models suggest strong volatility persistence in all twelve markets. There is high persistence in the absolute dependence of among market pairs. The evidence from the empirical analysis suggests that the cross-sectional average copula correlations generally remain at moderate levels with slight upward trend for all twelve markets. Correlation among the banking sectors of the advanced Asian markets economies are generally higher compared with the Emerging markets economies. The tail dependence is asymmetric across most of the market pairs; tail dependence at the lower side of the joint distributions is mostly higher than tail dependence at the upper side of the joint distributions. The results show that tail dependence is not upward trending for most of the pairs examined. However, the tail co-movements show significant spikes in response to financial stress in the global economy, which implies that there could be joint crashes in the regional banking system during extreme negative events. The fact that the region has not been the epicenter for most of the crisis periods covered in this study, yet responds significantly, makes it necessary for adoption of policies that maximize resilience to shocks. The study concludes that time-varying copulas are best suited for modeling the dependence structure of the Asian banking sector indices compared with static copula.JEL Classification: C14, F36, G10

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Section: Copula Models For Bivariate Distributionsmentioning

confidence: 99%

Dependence Patterns Among Banking Sectors in Asia: A Copula Approach

Mensah¹,

Premaratne

2014

SSRN Journal

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“…Hence, our study aims to fulfill this gap, in other words, we study the stock market volatility for the full sample and during global financial crises. The study is motivated based on some interesting works (Ä ijö 2008;Peng and Ng 2012;Li 2013), they analyze the most popular benchmark volatility indices (VIX, VXN, VDAX, VFTSE, VSMI, VXJ, and VSTOXX). These studies describe the term structure of implied volatility and their linkages, and financial contagion, asymmetric market dependence, market turmoil, and behavior of VIX.…”

Section: Introductionmentioning

confidence: 99%

The information content of implied volatility index (India VIX)

Shaikh

Padhi

2013

Glob Bus Perspect

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This paper examines the predictive ability of India VIX as the best forecast of realized return volatility. This study takes into account the implied volatility index (India VIX), also known as the investors fear gauge index. We have employed OLS, 2SLS procedure and quantile regression to study the predictive power of implied volatility index. Empirical results show that India VIX is the best estimate of future realized return volatility. The Hausman specification test analyzes that implied volatility is measured with the errors; consequently, instrumental variable technique is used. The 2SLS estimation procedure shows that 2SLS estimates are more consistent than the simple OLS. Finally, the 2SLS procedure explains that historical volatility does not contain valuable information what already contained in the implied volatility. The implied volatility best subsumes the marketwide information to explain the future volatility. This study explains that Asian implied volatility indices also subsumes the information regarding the future volatility like the US and European volatility indices.

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“…Salazar and Ng [32] investigated a non-parametric tail dependence estimator but focused only on bivariate pairs, while Kasch and Caporin [33] only considered global equity indices based on a variation of the DCC-MGARCH model. Most closely related to our work is probably Peng and Ng [19] who applied a dynamic mixed copula approach with a focus on tail dependencies to analyze contagion effects between stock index movements and showed that financial shocks have a stronger effect on the relationship between volatility indices as on the one between equities. Additionally, they find that (asymmetric) tail dependencies tend to change and increase in post-crisis periods.…”

Section: Introductionmentioning

confidence: 86%

“…Building on the results of [19] but going a step further, we will additionally incorporate potential regime switches in our analysis to account for structural breaks. The general idea of such setups based on Markov chains was introduced by [34] and has recently been linked with copula models as well (cf.…”

Section: Introductionmentioning

confidence: 99%

“…As shown by the financial crisis back in 2007/2008 or the very recent sell-off in global equity markets in early 2016, major shifts in market sentiment are often not restricted to some area of the world but seem to quickly spread globally. Various researchers (as [18][19][20][21][22][23]) discussed in the past that, for such structural breaks within the dependencies between equity markets, (implied) volatility might play an important role, as well.…”

Section: Introductionmentioning

confidence: 99%

See 1 more Smart Citation

Regime Switching Vine Copula Models for Global Equity and Volatility Indices

et al. 2017

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For nearly every major stock market there exist equity and implied volatility indices. These play important roles within finance: be it as a benchmark, a measure of general uncertainty or a way of investing or hedging. It is well known in the academic literature that correlations and higher moments between different indices tend to vary in time. However, to the best of our knowledge, no one has yet considered a global setup including both equity and implied volatility indices of various continents, and allowing for a changing dependence structure. We aim to close this gap by applying Markov-switching R-vine models to investigate the existence of different, global dependence regimes. In particular, we identify times of "normal" and "abnormal" states within a data set consisting of North-American, European and Asian indices. Our results confirm the existence of joint points in a time at which global regime switching between two different R-vine structures takes place.

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

Cited by 77 publications

References 58 publications

Dependence Patterns Among Banking Sectors in Asia: A Copula Approach

Dependence Patterns Among Banking Sectors in Asia: A Copula Approach

The information content of implied volatility index (India VIX)

Regime Switching Vine Copula Models for Global Equity and Volatility Indices

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