Analysing financial contagion and asymmetric market dependence with volatility indices via copulas |
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Authors: | Yue Peng Wing Lon Ng |
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Institution: | (1) University of Geneva (HEC and SFI), 40 boulevard du Pont-d’Arve, 1211 Geneva 4, Switzerland;(2) University of Aberdeen (Business School), Edward Wright Building, Aberdeen, AB24 3QY, Scotland, UK;(3) Bordeaux Ecole de Management, 33405 Talence Cedex, France;(4) University of Geneva (HEC), 40 boulevard du Pont-d’Arve, 1211 Geneva 4, Switzerland |
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Abstract: | This paper explores the cross-market dependence between five popular equity indices (S&P 500, NASDAQ 100, DAX 30, FTSE 100,
and Nikkei 225), and their corresponding volatility indices (VIX, VXN, VDAX, VFTSE, and VXJ). In particular, we propose a
dynamic mixed copula approach which is able to capture the time-varying tail dependence coefficient (TDC). The findings indicate
the existence of financial contagion and significant asymmetric TDCs for major international equity markets. In some situations,
although contagion cannot be clearly detected by stock index movements, it can be captured by dependence between volatility
indices. The results imply that contagion is not only reflected in the first moment of index returns, but also the second
moment, i.e. the volatility. Results also show that dependence between volatility indices is more easily influenced by financial
shocks and reflects the instantaneous information faster than the stock market indices. |
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