Modelling the dependence structures among international stock markets using copulas: Evidence from South Africa and advanced economies
Date
2023
Authors
Journal Title
Journal ISSN
Volume Title
Publisher
niversity of the Witwatersrand, Johannesburg
Abstract
Growth in financial linkages has led to similar movements between financial markets. This increase in financial market interdependence or comovement raises questions about the transmission of risk through conventional channels (balance sheet, trade dependence and portfolio flows), particularly the methods policymakers and institutional investors use to measure the strength and intensity of these transmission channels. This study will add to the literature by empirically assessing the dependence structure between South Africa and Advanced Economies (AE) stock prices, to determine if diversification is still possible. These are represented by the Johannesburg Securities Exchange (JSE TOP 40 index for South Africa, the Standard and Poor’s 500 (S&P 500) for the United States, Financial Times Stock Exchange 100 (FTSE 100) for the UK, and the Deutscher Aktienindex for Germany. This study will model the dependence structure using both static and time-varying copula methods. The time-varying copula model specification is adapted from the Generalized Autoregressive Score (GAS) model of Creal et al (2013). This study finds little evidence to support the benefit of diversification between South Africa’s stock market and advanced economies. The results are consistent with the stylised facts in the literature: asset returns are asymmetric and leptokurtic and the dependence between markets intensifies during crisis periods. The findings of this study are consistent with prior literature on African markets (Mensah and Alagidede, 2017, Bello et al, 2022)
Description
A Research Report submitted in partial fulfillment of the Degree of Master of Commerce (Economic Science) in the School of Economics and Finance, University of the Witwatersrand, 2023
Keywords
Association, Dependence, Copula, Conditional Tail-Dependence, Diversification, Contagion, Economy, UCTD
Citation
Foresto, Anis. (2023). Modelling the dependence structures among international stock markets using copulas: Evidence from South Africa and advanced economies [Master’s dissertation, University of the Witwatersrand, Johannesburg]. WireDSpace.