Measuring and Testing Tail Dependence and Contagion Risk between Major Stock Markets

Su, EnDer (2013): Measuring and Testing Tail Dependence and Contagion Risk between Major Stock Markets.

Abstract

In this paper, three copula GARCH models i.e. Gaussian, Student-t, and Clayton are used to estimate and test the tail dependence measured by Kendall’s tau between six stock indices. Since the contagion risk spreads from large markets to small markets, the tail dependence is studied for smaller Taiwanese and South Korean stock markets, i.e. Taiex and Kospi against four larger stock markets, i.e. S&P500, Nikkei, MSCI China, and MSCI Europe. The vector autoregression result indicates that S&P500 and MSCI China indeed impact mostly and significantly to the other four stock markets. However, the tail dependence of both Taiex and Kospi against S&P500 and MSCI Chia are lower due to unilateral impacts from US and China. Using Clayton copula GARCH, the threshold tests of Kendall’s tau between most stock markets except China are significant during both subprime and Greek debt crises. The tests of Student-t copula GARCH estimated Kendall’s taus are only acceptable for subprime crisis but not for Greek debt crisis. Thus, Clayton copula GARCH is found appropriate to estimate Kendall’s taus as tested by threshold regression.

• Item Type: MPRA Paper
• Language: English
• Keywords: contagion risk, tail dependence, copula GARCH, threshold test
• Subjects: C - Mathematical and Quantitative Methods > C0 - General; C - Mathematical and Quantitative Methods > C1 - Econometric and Statistical Methods and Methodology: General > C13 - Estimation: General

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