A revisit to the dependence structure between the stock and foreign exchange markets: A dependence-switching copula approach

Wang, Yi-Chiuan; Wu, Jyh‐Lin; Lai, YiHao

doi:10.1016/j.jbankfin.2013.01.001

Cited by 112 publications

(18 citation statements)

References 35 publications

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“…The main advantage of this model is that it does not require an ad hoc determination of change point in the dependence structure. Prior studies like [29]- [32] apply Markov-switching copula functions to examine the dependence between international stock markets. However, these studies consider a finite mixture of conditional bivariate copulas, where the copula parameter is fixed but the functional form of the copula functions follows a Markov-switching model.…”

Section: Introductionmentioning

confidence: 99%

Markov-Switching Time-Varying Copula Modeling of Dependence Structure between Oil and GCC Stock Markets

Boubaker¹,

Sghaier²

2016

OJS

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This paper proposes a Markov-switching copula model to examine the presence of regime change in the time-varying dependence structure between oil price changes and stock market returns in six GCC countries. The marginal distributions are assumed to follow a long-memory model while the copula parameters are supposed to evolve according to the Markov-switching process. Furthermore, we estimate the Value-at-Risk (VaR) based on the proposed approach. The empirical results provide evidence of three regime changes, representing pre-crisis, financial crisis and post-crisis, in the dependence structure between energy and GCC stock markets. In particular, in the pre-and post-crisis regimes, there is no dependence, while in the crisis regime, there is significant tail dependence. For OPEC countries, we find lower tail dependence whereas in non-OPEC countries, we see upper tail dependence. VaR experiments show that the Markov-switching timevarying copula model performs better than the time-varying copula model.

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Section: Introductionmentioning

confidence: 99%

Markov-Switching Time-Varying Copula Modeling of Dependence Structure between Oil and GCC Stock Markets

Boubaker¹,

Sghaier²

2016

OJS

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“…2). Copulas have been applied across a range of disciplines such as hydrology (Zhang et al, 2011;Shiau and Shen, 2001;Shiau et al, 2007;Li et al, 2013), engineering (Lebrun and Dutfoy, 2009), meteorology (Liu et al, 2011;Madadgar and Moradkhani, 2011), and economics (Wang et al, 2013;Dajcman, 2013)…”

Section: Step 3: Estimate Copula Parametermentioning

confidence: 99%

Design droughts as planning tool for ecosystem establishment in post-mining landscapes

Halwatura¹,

Lechner²,

Arnold³

2014

Preprint

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Abstract. Eastern Australia has considerable mineral and energy resources and areas of high biodiversity value co-occurring over a broad range of agro-climatic environments. Water is the primary abiotic stressor for (agro)ecosystems in many parts of Eastern Australia. In the context of mined land rehabilitation quantifying the severity-duration-frequency (SDF) of droughts is crucial for successful ecosystem rehabilitation to overcome challenges of early vegetation establishment and long-term ecosystem resilience. The objective of this study was to quantify the SDF of short-term and long-term drought events of 11 selected locations across a broad range of agro-climatic environments in Eastern Australia by using three drought indices at different time scales: the Standardized Precipitation Index (SPI), the Reconnaissance Drought Index (RDI), and the Standardized Precipitation-Evapotranspiration Index (SPEI). Based on the indices we derived bivariate distribution functions of drought severity and duration, and estimated the recurrence intervals of drought events at different time scales. The correlation between the simple SPI and the more complex SPEI or RDI was stronger for the tropical and temperate locations than for the arid locations, indicating that SPEI or RDI can be replaced by SPI if evaporation plays a minor role for plant available water. Both short-term and long-term droughts were most severe and prolonged, and occurred most frequently in arid regions, but were relatively rare in tropical and temperate regions. Our approach is similar to intensity-duration-frequency (IDF) analyses of rainfall crucial to design infrastructure. In this regard, we propose to apply SDF analyses of droughts to design ecosystem components in post-mining landscapes. Together with design rainfalls, design droughts should be used to assess rehabilitation strategies and ecological management based on drought recurrence intervals, thereby minimising the risk of failure of initial ecosystem establishment due to ignorance of fundamental abiotic and site-specific environmental barriers.

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“…This shows great potential for diversification. The dependence structure can be seen in the empirical copula section of Table 3 ( Wang et al, 2013). Take the relation between the short-term and long-term treasury bonds in 2010 as an example.…”

Section: Investment Universementioning

confidence: 99%

Strategic Asset Allocation for China's Foreign Reserves: A Copula Approach

Zhang

2013

China and World Economy

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In this paper, we study strategic asset allocation for China's foreign reserves using a riskbased approach. Four aspects of the risk management are investigated: an investment universe, dependence structure, allocation strategies under risk minimization and trade-off between risks and returns. A regime-switching copula model is developed to investigate the dynamic dependence between assets. One regime emphasizes a short-term safe asset and the other regime emphasizes a long-term safe asset. The optimal allocation is derived following two strategies: risk minimization and trade-off between risks and returns in utility maximization with disappointment avoidance. If the central bank focuses solely on risk minimization, the asymmetries in the asset return dependence encourage the flight to safety.However, if higher risks are allowed in exchange for higher returns, even the exchange is very conservative, and the asymmetries would discourage the flight to safety. Therefore, we suggest that China should mitigate its flight to safety after 2008 and increase holdings of short-term bank deposits, long-term treasury bonds and euro bonds.

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A revisit to the dependence structure between the stock and foreign exchange markets: A dependence-switching copula approach

Cited by 112 publications

References 35 publications

Markov-Switching Time-Varying Copula Modeling of Dependence Structure between Oil and GCC Stock Markets

Markov-Switching Time-Varying Copula Modeling of Dependence Structure between Oil and GCC Stock Markets

Design droughts as planning tool for ecosystem establishment in post-mining landscapes

Strategic Asset Allocation for China's Foreign Reserves: A Copula Approach

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