Dependence structure among international stock markets: a GARCH--copula analysis

In this article, we investigate the dependence structure among international stock markets, with particular emphasis on developed and emerging stock markets, as proxied for by major country-level exchanges. Specifically, we adopt the copula model for the presented analysis and find that an asymmetric dependence relationship only exists between developed and emerging markets. In particular, emerging markets are sensitive to outside negative news (downside risk) from developed markets. We also compare the dependence structure of the analysed stock markets in the pre- and post-2007 financial crisis periods and draw three broad conclusions. First, the correlations among these markets increase during the crisis period because of the contagion effect. Second, even though the dependence for both markets is weaker during the pre-crisis period, this tendency is more obvious for emerging markets. Finally, the dependence structure changes considerably across these sub-periods, mainly because each country implements an independent economic stimulus policy to overcome these crises.