How are Africa's emerging stock markets related to advanced markets? Evidence from copulas

The finance literature provides ample evidence that diversification benefits hinges on dependence between assets returns. A notable feature of the recent financial crisis is the extent to which assets that had hitherto moved mostly independently suddenly moved together resulting in joint losses in most advanced markets. This provides grounds to uncover the relative potential of African markets to provide diversification benefits by means of their correlation with advanced markets. Therefore, we examine the dependence structure between advanced and emerging African stock markets using copulas. Several findings are documented. First, dependence is time-varying and weak for most African markets, except South Africa. Second, we find evidence of asymmetric dependence, suggesting that stock return comovement varies in bearish and bullish markets. Third, extreme downward stock price movements in the advanced markets do not have significant spillover effects on Africa’s emerging stock markets. Our results, implying that African markets, with the exception of South Africa, are immune to risk spillover from advanced markets, improves the extant literature and have implications for portfolio diversification and risk management.     

Do oil producing countries offer international diversification benefits? Evidence from GCC countries

This paper provides evidence of the existence of diversification benefits in international stock markets when oil producing countries are included in a global portfolio. Moreover, it examines whether recent oil shocks and financial events have significant impact on the conditional correlations and diversification benefits. Using stock returns from developed, emerging, GCC countries and a global portfolio, the empirical findings show that while developed and emerging stock markets have experienced increased correlations over relatively long periods of time, the correlation in GCC stock markets remained low and constant offering high diversification benefits. Interestingly, the paper also finds that, during 2012–2014, the rising conditional correlation levels have reversed trends in developed and emerging markets alike offering more potential for international diversification. Our results are robust to model selection, data frequency, and innovations distribution.     

Tail dependence analysis of stock markets using extreme value theory

Financial risk modelling frequently uses the assumption of a normal distribution when considering the return series which is inefficient if the data is not normally distributed or if it exhibits extreme tails. Estimation of tail dependence between financial assets plays a vital role in various aspects of financial risk modelling including portfolio theory and hedging amongst applications. Extreme Value Theory (EVT) provides well established methods for considering univariate and multivariate tail distributions which are useful for forecasting financial risk or modelling the tail dependence of risky assets. The empirical analysis in this article uses nonparametric measures based on bivariate EVT to investigate asymptotic dependence and estimate the degree of tail dependence of the ASX-All Ordinaries daily returns with four other international markets, viz., the S&P-500, Nikkei-225, DAX-30 and Heng-Seng for both extreme right and left tails of the return distribution. It is investigated whether the asymptotic dependence between these markets is related to the heteroscedasticity present in the logarithmic return series using GARCH filters. The empirical evidence shows that the asymptotic extreme tail dependence between stock markets does not necessarily exist and rather can be associated with the heteroscedasticity present in the financial time series of the various stock markets.     

How to maximize golden opinions

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.     

Co-movement and spillovers: empirical evidence from BRIC equity markets

A higher degree of co-movement and spillover effects among different asset classes undermine portfolio diversification benefits. In this regard, the present study attempts to capture dynamic co-movement and return-volatility spillover effects among the most promising emerging equity markets, i.e. Brazil, Russia, India and China in a multivariate framework by employing VAR-ABEKK and VAR-DCC-AGARCH (1,1) models. To further comprehend the behaviour of the correlation coefficients during the global financial crisis period (2007–2009), heat map and Markov regime switching model (two regimes with a switch at ‘mean’ level only) have been used. The results report that the BRIC equity markets do not share a common stochastic trend in the long run. There is strong evidence of market shocks to volatility, volatility to volatility and negative shocks to volatility spillover effects among the BRIC markets. Overall, the BRIC markets are partially integrated with each other, thereby making them stronger investment candidates.     

Contagion of the Global Financial Crisis and the real economy: A regional analysis

This paper investigates the contagion effects of the Global Financial Crisis (2007–2009) by examining ten sectors in six developed and emerging regions during different phases of the crisis. The analysis tests different channels of financial contagion across regions and real economy sectors by utilizing dynamic conditional correlation from the multivariate Fractionally Integrated Asymmetric Power ARCH (FIAPARCH) model. Evidence shows that the GFC can be characterized by contagion effects across regional stock markets and regional financial and non-financial sectors.However, Developed Pacific region and some sectors in particular Consumer Goods, Healthcare and Technology across all regions seem to be less affected by the crisis, while the most vulnerable sectors are observed in the emerging Asian and European regions. Further, the analysis on a crisis phase level indicates that the most severe contagion effects exist after the failure of Lehman Brothers limiting the effectiveness of portfolio diversification.     

Diversification into Emerging Markets – An Australian and the US Perspective Using a Time‐varying Approach

Over the past two decades, a number of studies have examined the benefits of diversifying equity investments internationally, particularly into emerging markets. In the portfolio construction process, many researchers have criticised Markowitz's Portfolio Theory because of its inherent assumptions such as symmetric and constant correlations. In this study, we use a conditional copula model to estimate the time‐varying asymmetric correlations of stock markets and construct optimal portfolios by using estimated correlations. We find that optimised portfolios provide significant benefits for both Australian and the US investors. Out‐of‐sample results show Copula model provides results closer to the in‐sample‐estimated benefits of diversification. The results have important implications for portfolio managers who seek to diversify into emerging markets.     

艺术品的金融属性：投资收益与资产配置*

本文基于2000—2014年中国艺术品拍卖市场近现代国画的微观数据,在资产配置中引入市场交易机制中的佣金变量,加入艺术品市场规模约束,采用重复交易法实证计量嵌入艺术品市场的投资收益特征并量化其资产配置效应,以测度其市场功能。优质的艺术精品具备金融资产风险和收益的基本特征,本文对艺术品资产与资本资产定价模型的适应性进行讨论。研究表明：在样本期内,剔除通胀和佣金成本因素后收益率更加贴近现实,中国艺术品投资的实际收益率水平为1308%,表现出高于欧美市场的投资溢价;艺术品投资与传统的股票、债券等金融资产之间表现出相对独立性,并能有效改善投资者资产组合的风险边界,可以成为资产配置优化和多样化的重要选择。中国艺术品市场的长期稳健发展将为投资者提供更多的资产优化产品和工具。     

Diamonds and precious metals for reduction of portfolio tail risk

ABSTRACT

We study the performance of diamonds compared to gold and other precious metals in mitigating the tail risk of a diversified equity market portfolio over the period June 2007 to October 2018. Our results display a diversification benefit of some diamond indices, which also improve the portfolio reward-to-risk ratio. To corroborate this evidence, we study the dependence structure and tail dependence of diamonds and a broad equity market portfolio and compare it to the dependence obtained with gold and other precious metals. Results from fitting a bivariate copula show that the average left tail dependence reaches its minimum when diamonds are used. We also show that using shares of diamond-mining companies does not provide the same benefits.     

Portfolio management with tail dependence

Many publications, that treated with Portfolio Management, were devastating for all asset allocation models in the context of portfolios. The elimination of extreme events (asymmetric or tail dependence) during the portfolio construction process can reduce the skills of asset managers to reduce risk through diversification. The copula theory allows us to calculate an alternative to measure the dependence of extreme events in assets through the index lower tail dependence. We check that the strategies with tail dependence overcame Talmud rule, the Markowitz model and the model of Tu and Zhou by simulating 1,000 portfolios with 3, 5, 10 and 20 randomly selected assets from DJIA for the period 03/1990 until 12/2016. We conclude that models of tail dependence and Markowitz had more performance ex-ante than Talmud and the Tu and Zhou model for portfolios with 3, 5, 10 and 20 assets. Tail dependence models overcome Markowitz, in terms of cumulative return, in over 60% of months considered in the analysis. The results indicate that the Talmud rule should be discarded in a context of constructing portfolios with individual stocks ahead strategies with tail dependence.     

Islamic financial markets and global crises: Contagion or decoupling?

This paper investigates the contagion effects of the global financial crisis (GFC) and Eurozone sovereign debt crisis (ESDC) on Islamic equity and bond markets. Using a sample of Islamic stock indices from various developed and emerging markets and the global Islamic stock and bond (sukuk) indices, we explore asymmetric conditional correlation dynamics across stable and crisis periods and across the two crises. The results fail to provide strong contagion evidence between conventional and Islamic equity and bond indices, supporting the decoupling hypothesis of the Islamic securities. Our findings imply that Islamic equities and bonds may provide a cushion against risk and instability, particularly in periods of turmoil. The small number of contagion cases mostly relates to the ESDC and developed Islamic stock indices. The findings also show that the Islamic emerging stock indices in the BRICS provide the most effective international portfolio diversification benefits compared to the Islamic developed indices.     

“金砖四国”股票市场间相依结构分析

金融市场间的相依关系及其结构分析是金融风险测度、资产组合管理等金融理论和实务中的一个重要问题,而基于线性相关系数是难以正确刻画非线性条件下金融资产间的相关结构,特别是尾相依关系。为研究"金砖四国"新兴股票市场间的相依结构,文章构建了一个混合Copula模型,对"金砖四国"股票市场间的相依结构进行建模分析,并将结果与单一阿基米德Copula模型进行了比较,表明混合Copula模型既能保留单一Copula模型的特性,更能灵活、全面地刻画变量间的相依关系。实证研究的结果表明:在样本数据期间,"金砖四国"股票市场间存在非对称相关关系,相依结构上存在差异;中国上证综指波动较为剧烈,与其它三国指数间以下尾相依为主;巴西、印度、俄罗斯三国股指间的相依结构相似,联动相关性相近,并无显著的下尾相依关系。     

Analyzing the dependence structure of various sectors in the Brazilian market: A Pair Copula Construction approach

In this paper we estimate the dependence structure between economic sectors in the Brazilian financial market through Pair Copula Construction. We use daily data from indices which represent telecommunications, energy, industrials, consumer, financial, basic materials and real estate sectors in BM&F/Bovespa. Results indicate predominance of student's t copula in structure. BB1, BB7, BB8, Frank and Joe copulas also fit into some relationships. Regarding dependence, tail measures obtain relevant values in most relationships. Lower tail dependence exceeds absolute, measured by Kendall's Tau, and upper tail in many cases, reflecting the asymmetry in some relationships. Further, in order to give robustness to these results, we forecast daily Value at Risk, considering distinct significance levels, of a portfolio composed of studied sectors through the estimated structure. Results allow one to conclude that VaR predictions are correct. These results permit business industry participants to construct portfolios with assets of these sectors under a proper diversification structure. Moreover, from an international point of view, investors who are interested in diversification could perform more sophisticated strategies in this country rather than simply trading the index.     

Volatility and dynamic conditional correlations of worldwide emerging and frontier markets

This study examines the relationship between time-varying correlations and conditional volatility among 32 worldwide emerging and frontier stock markets and the MSCI World stock market index from January 2000 to December 2012. Correlations are estimated in the standard and asymmetric dynamic conditional correlation model frameworks. The results can be summarized by three main findings: (1) asymmetry in volatility is not a common phenomenon in emerging and frontier markets; (2) asymmetry in correlations is found only with respect to the Hungarian stock market; and (3) the relationship between volatility and correlations is positive and significant in most countries. Thus, diversification benefits decrease during periods of higher volatility.     

Has co-movement dynamics in emerging stock markets changed after global financial crisis? New evidence from wavelet analysis

In this article, we revisit the issue of contagion, interdependence and changes in correlation structure after the Global Financial Crisis (GFC) of 2008 between developed and emerging markets in a time-frequency domain using a wavelet-based approach for the period spanning over 1 January 1999 to 8 November 2016. We report evidences of: (a) weaker contagion for Latin American emerging markets during GFC, (b) a strong contagion effect for emerging markets in Europe and the Middle East and (c) a fall in long-run co-movements after GFC, which means by investing in emerging markets, the diversification benefits can be derived in the long run. We report evidence of coexistence of contagion and permanent change in correlation structure.     

Intraindustry Trade in Identical Products: a Portfolio Approach

In the traditional model, intraindustry trade in an identical product is driven by the profit margin each firm perceives in the rival market on the basis of Cournot conjectures. The authors demonstrate that when markets are stochastic and potentially correlated, benefits from diversification create added incentives for cross–hauling for risk–averse Cournot duopolists. The portfolio motive for cross–hauling makes the unusual pattern of trade a theoretically more robust phenomenon than has been recognized in the traditional models. The benefits from diversification can raise producer welfare in the intraindustry trade equlibrium, unlike in the deterministic model.     

Financial crises and dynamic linkages across international stock and currency markets

This paper investigates contagion across stock and currency markets of China, Eurozone, India, Japan and US during global financial crisis and Eurozone crisis. The crisis periods are selected using Markov-switching models for US and Eurozone markets. We, then, utilize the DCC-GARCH model to estimate conditional correlation among the assets and test for contagion/flight to quality effects during the crises. The results show significant contagion as well as flight to quality effects both across and within asset classes. We examine the impact of financial stress index on the correlation across markets and find that portfolio diversification benefits for equity markets may be non-existent.     

A re-examination of international portfolio diversification based on evidence from leveraged bootstrap methods

This article investigates the issue of international portfolio diversification with respect to the three largest financial markets in the world—namely the US, Japan and the UK. In addition to making use of traditional portfolio analysis, we also suggest a procedure to calculate bootstrap correlation coefficients that can take into account the dynamic structure between the markets as measured by bootstrapped causality tests. Weekly data is used. The results from the first approach are supporting international diversification. The bootstrapped causality tests provide additional empirical support for this conclusion since the size of the causal effects is negligible and the bootstrap correlations are similar as the standard ones.     

A new approach to modeling co-movement of international equity markets: evidence of unconditional copula-based simulation of tail dependence

Analyzing equity market co-movements is important for risk diversification of an international portfolio. Copulas have several advantages compared to the linear correlation measure in modeling co-movement. This paper introduces a copula ARMA-GARCH model for analyzing the co-movement of international equity markets. The model is implemented with an ARMA-GARCH model for the marginal distributions and a copula for the joint distribution. After goodness of fit testing, we find that the Student’s t copula ARMA(1,1)-GARCH(1,1) model with fractional Gaussian noise is superior to alternative models investigated in our study where we model the simultaneous co-movement of nine international equity market indexes. This model is also suitable for capturing the long-range dependence and tail dependence observed in international equity markets. Rachev’s research was supported by grants from Division of Mathematical, Life and Physical Science, College of Letters and Science, University of California, Santa Barbara, and the Deutschen Forschungsgemeinschaft (DFG). Sun’s research was supported by grants from the Deutschen Forschungsgemeinschaft (DFG) and Chinese Government Award for Outstanding Ph.D Students Abroad 2006, No. 2006-180. Kalev’s research was supported with a NCG grant from the Faculty of Business and Economics, Monash University. Data are supplied by Securities Industry Research Center of Asia-Pacific (SIRCA) on behalf of Reuters. The constructive comments of two anonymous referees, the Associate Editor, A.S. Wirjanto, and the Editor-in-charge, Baldev Raj, are gratefully acknowledged. The reviewers and editors are not responsible for any residual errors and omissions.     

Oil and US stock market shocks: Implications for Canadian equities

Oil and US stock market shocks are relevant to Canadian equities because Canada is an oil exporter exposed to market developments in the wider continent. We evaluate how the relationship between Canadian stock market indices and such external shocks change under extraordinary events. To do this, we subject statistically identified oil and S&P 500 market shocks to a surprise filter, which detects shocks with the greatest magnitude occurring over a given lookback period, and an outlier filter, which detects extrema shocks that exceed a normal range. Then, we examine how the dependence structure between shocks and Canadian equities change under the extreme surprise and outlier episodes through various co-moment spillover tests. Our results show co-moments beyond correlation are important in reflecting the changes occurring in the relationships between external shocks and Canadian equities in extreme events. Additionally, the differences in findings under extreme positive and negative shocks provide evidence for asymmetric spillover effects from the oil and US stock markets to Canadian equities. Moreover, the observed heterogeneity in the relationships between disaggregated Canadian equities and shocks in the crude oil and S&P 500 markets are useful to policy-makers for revealing sector-specific vulnerabilities and provide portfolio diversification opportunities for investors to exploit.