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

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  • Righi, Marcelo Brutti
  • Ceretta, Paulo Sergio

Abstract

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.

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  • Righi, Marcelo Brutti & Ceretta, Paulo Sergio, 2013. "Analyzing the dependence structure of various sectors in the Brazilian market: A Pair Copula Construction approach," Economic Modelling, Elsevier, vol. 35(C), pages 199-206.
    • Handle: RePEc:eee:ecmode:v:35:y:2013:i:c:p:199-206
    DOI: 10.1016/j.econmod.2013.06.012
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    Cited by:

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    2. Poornima Unnikrishnan & Kumaraswamy Ponnambalam & Fakhri Karray, 2024. "Influence of Regional Temperature Anomalies on Strawberry Yield: A Study Using Multivariate Copula Analysis," Sustainability, MDPI, vol. 16(9), pages 1-17, April.
    3. Mensah, Jones Odei & Alagidede, Paul, 2017. "How are Africa's emerging stock markets related to advanced markets? Evidence from copulas," Economic Modelling, Elsevier, vol. 60(C), pages 1-10.
    4. Marcela de Marillac Carvalho & Luiz Otávio de Oliveira Pala & Gabriel Rodrigo Gomes Pessanha & Thelma Sáfadi, 2021. "Asymmetric dependence of intraday frequency components in the Brazilian stock market," SN Business & Economics, Springer, vol. 1(6), pages 1-18, June.
    5. Fousekis, Panos & Grigoriadis, Vasilis, 2016. "Spatial price dependence by time scale: Empirical evidence from the international butter markets," Economic Modelling, Elsevier, vol. 54(C), pages 195-204.

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    More about this item

    Keywords

    Dependence; Risk management; Pair Copula Construction; Sectors; Brazilian market;
    All these keywords.

    JEL classification:

    • C00 - Mathematical and Quantitative Methods - - General - - - General
    • C5 - Mathematical and Quantitative Methods - - Econometric Modeling
    • G2 - Financial Economics - - Financial Institutions and Services

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