Equity Dependence Structures amid Unconventional Monetary Initiatives

Abstract

This study attempts to capture dependence structures between major equity market indexes, namely MSCI’s China, emerging markets excluding Asia, Europe, frontier markets, Japan, and USA indexes, by employing a Gumbel copula approach. The span of daily data ranges from 2011 to 2016—a period in the aftermath of the U.S. financial crisis when several unconventional monetary initiatives were undertaken by international economies. Following the financial crisis, there was a significant increase in cross-border equity flows across international markets, so dependency structures or association between the latter equity markets hold an important place in portfolio management decisions. The results show different magnitudes of dependence structures between the undertaken markets. The highest magnitude of association is observed for emerging markets excluding Asia–Europe and the lowest for USA–Japan. These findings bear strong implications for market participants and policy makers in the wake of the propagation of shocks via equity markets.

TOPICS: Mutual funds/passive investing/indexing, emerging, statistical methods, portfolio construction