Assessing the structure dependence between the Spanish stock market and some international financial markets. A time-varying copula analysis.

Abstract

In this study we use time-varying copula analysis to investigate the dependence between the Spanish stock market, represented by the IBEX35 index, and some international stocks and commodities markets. The results indicate that: first, the European stock markets offer limited diversification possibilities. Second, American markets offer higher diversification possibilities than the European markets but the diversification may not work in an extreme market condition; here we find strong evidence of contagion effect. Third, the Asian markets outperform to the American markets offering higher diversifications possibilities even in extreme market conditions. Fourth, the assets negotiated in the Shanghai market may be considered hedge assets instead of diversifier assets; this feature is shared by the Bitcoin and Gold although the role of this last asset is highly volatile. These results provide useful information for those who seek to actively diversify their international portfolios and to manage their worldwide assets. Finally, we observe that degree of dependence derived from the correlation analysis is notably higher than the suggested by the copula analysis; this may be due the fact that correlation coefficient does not consider conditional heteroscedasticity so that correlations will be biased upwards.

A Comparison of Information Criterion for Choosing Copula Models

“…To overcome these limitations a copula analysis has been proposed. Application of copula analysis for analyzing contagion effect can be found in Rajwani and Kumar (2019), Liu (2011), Horta, Mendes andVieira (2010), Hussain and Li (2018), Weng, Wei and Huang (2012), Nguyen, Ishac and Henri (2017) and more recently in Cambriles and Benito (2023).…”

“…Copula analysis appropriately describes the dependence structure between random variables so that it has been applied with success in different fields: actuarial science, (Frees & Valdez, 1998;Otani & Imai, 2013) public health and medical (Winkelmann, 2012), hydrology (Genest, Favre, Bé liveau & Jacques, 2007) and finance (Nikoloulopoulos, Joe & Li, 2012;Jondeau & Rockinger, 2006;Embrechts, McNeil & Liu, 2002). In this last field, the copula models have many applications, as for instance in the area of risk aggregation (Chavez-Demoulin, Embrechts & Nešlehová, 2006;Embrechts & Puccetti, 2006;Fantazzini, Dalla-Valle & Giudici, 2008) and the study of the contagion effect (Cambriles & Benito, 2023;Rajwani, &Kumar, 2019 andHussain &Li, 2018). Besides, copula analysis can also be used for analysing the properties of an asset as a diversifier and risk hedge (Kliber, Marszałek, Musiałkowska & Świerczyńska, 2019;Kang, Mclver, &Arreola, 2019 andFeng, Wang, &Zhang, 2018).…”