Vine Copula Approach to Understand the Financial Dependence of the Istanbul Stock Exchange Index

Abstract

Recently, the complex dependence patterns among various stocks gained more importance. Measuring the dependency structure is critical for investors to manage their portfolio risks. Since the global financial crisis, researchers have been more interested in studying the dynamics of dependency within stock markets by using novel methodologies. This study aims to investigate a Regular-Vine copula approach to estimate the interdependence structure of the Istanbul Stock Exchange index (ISE100). For this purpose, we consider 32 stocks related to 6 sectors belonging to ISE100. To reflect the time-varying impacts of the 2008–2009 global financial crisis, the dependence analysis is conducted over pre-, during-, and post-global financial crisis periods. Portfolio analysis is considered via a rolling window approach to capture the changes in the dependence. We compare the Regular-Vine-based generalized autoregressive conditional heteroskedasticity (GARCH) against the conventional GARCH model with different innovations. Value at risk and expected shortfall risk measures are used to validate the models. Additionally, for the constructed portfolios, return performance is summarized using both Sharpe and Sortino ratios. To test the ability of the considered Regular-Vine approach on ISE100, another evaluation has been done during the COVID-19 pandemic crisis with various parameter settings. The main findings across different risky periods illustrate the suitability of using the Regular-vine GARCH approach to model the complex dependence among stocks in emerging market conditions.