Is global diversification rational? Evidence from emerging equity markets through mixed copula approach

Abstract

In this article, we aim to model the level and structure of the dependence between the world's leading stock markets and those of the emerging market groups - Europe, Latin America and Far East. To this end we use a mixture model of Gaussian, Gumbel and Gumbel survival copulas. Our results indicate that none of the pairs of stock markets exhibit a right-tail dependence structure. All valid models exhibit a mixture of Gaussian and left-tail dependence structure. Our findings imply that Gaussian dependence structure is dominant in most of the models. The emerging equity markets in the European region exhibit the most significant dependence structure with the world leaders. Furthermore, most of the emerging equity markets have a significant dependence structure with the US stock market. We further compare our findings with the results of the conventional correlation coefficients and conclude the importance of using copula models in analysing the portfolio diversification opportunities. Our findings overall indicate two important remarks: First, the copula models reveal better indicators for global investors to establish a diversified portfolio; Second, international equity markets exhibit significant dependence, which leaves a smaller opportunity to benefit from international portfolio diversification.

Gold price and stock markets nexus under mixed-copulas

“…Numerous papers report investigations of interdependence, contagion effects and relationships between stock markets and/or other markets, such as bond markets. Among others, Patton (2006), Hu (2006), Rodriguez (2007), Turgutlu and Ucer (2010), Aloui et al (2011), Chollete et al (2011, Garcia and Tsafack (2011), Bhatti and Nguyen (2012), Chang (2012), Naifar (2012) and Meng and Liang (2013). For example, Reboredo (2013) use only different single copula functions to test if gold is a safe haven or a hedge for the US against exchange 3 Interested readers are referred to an excellent survey paper by O'Connor et al (2015) and some review related to heavy tails and its applications in time series ARCH and GARCH models are given by Harvey's (2013) book.…”

“…However, combinations of different single copula functions have also been used by Hu (2006), Turgutlu and Ucer (2010), Chang (2012) and Chen et al (2014). Hu (2006) used a mixed copula model of Gumbel, a survival Gumbel and Gaussian copulas to analyse four international financial markets; the S&P 500, FTSE 100, Nikkei 225 and the Hang Seng indices from 1970 to 2003.…”

Analyzing Dependence Structure of Equity, Bond and Money Markets by Using Time-Varying Copulas

“…Then, the filtered series will be used in the estimation process. This GARCH filter proved to be suitable for return series in the estimation process as in Hu (2006) and Turgutlu and Ucer (2007).…”

“…With this objective, copula models have been used in recent empirical finance literature. Their use dates back to 1999 in Embrecht et al (1999), Ane and Kharoubi (2003), Hu (2006), Patton (2006), Choudhury and Bhatti (2006), Turgutlu and Ucer (2007), Li (2010), Nguyen and Bhatti (2012), Aldel and Salma (2012) amongst others.…”

Impacts Of The 2008 Financial Crisis On South American Equity Markets

“…They showed that all three countries (Brazil, Mexico, and Argentina) had high conditional correlation with the US market during the crisis by estimating the dynamic conditional correlation model. Turgutlu and Ucer (2010) reported that most of the emerging markets had a significant dependence with the US stock markets and international stock markets are significantly interdependent, which leaves a smaller chance to benefit from international portfolio diversification. Gklezakou and Mylonakis (2010) examined ten global stock markets to figure out the effect of economic crisis on the stock markets.…”