Analyzing Markov dependence-switching between E7 stock markets

Abstract

We investigate the dependence structure among the seven emerging stock markets namely Brazil, China, India, Indonesia, Mexico, South Korea, and Turkey for the period 2000 to 2018 by employing a dependence-switching copula model. This model allows us to investigate the tail dependence and regime shift between positive and negative correlation for bull and bear stock pairs. Our overall results show that under the negative correlation regime, only 8 out of 21 paired stock markets have asymmetric dependence, and 6 out of 21 paired stock markets have asymmetric tail dependence. Although the emerging stock markets are deemed by the global investors to be a homogenous class, these stock markets manifest varied degree of traits. Henceforth, from a portfolio diversification perspective, the global investors can exploit the diversification opportunities offered by the selected stock markets. These findings have appropriate implications from the perspective of asset pricing and risk management. The study recommends that regulators should provide a roadmap for identifying risk’s effects across the selected emerging stock markets. Moreover, policy makers should consider what further financial collaboration they intend to pursue for enabling greater accessibility to the selected emerging stock markets.