Fitted Copula Statistical Models for Four African and Four Major Stock Markets

Ngozi Fidelia Adum,Francis Chukwuemeka Eze,Happiness Onyebuchi Obiora-Ilouno

doi:10.34198/ejms.7121.195227

Ngozi Fidelia Adum, Francis Chukwuemeka Eze + Show 1 more

Open Access

https://doi.org/10.34198/ejms.7121.195227

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Abstract

The application of copula has become popular in recent years. The use of correlation as a dependence measure has several pitfalls and hence the application of regression prediction model using this correlation may not be an appropriate method. In financial markets, there is often a non-linear dependence between returns. Thus, alternative methods for capturing co-dependency should be considered, such as copula based ones. This paper studies the dependence structure between the four largest African stock markets in terms of market capitalization and other developed stock markets over the period 2003 to 2018 using copula models. The value at risk was used to determine the risk associated with the stock. The ten copula models were fitted to the log returns calculated from the data, two countries at a time of the twenty-eight pairs and examined. The Gumbel copula gives the best fit in terms of log-likelihood values, value of the Akaike information criterion, value of the Bayesian information criterion, value of the consistent Akaike information criterion, value of the corrected Akaike information criterion, value of the Hannan Quinn criterion and p-value of the information matrix equality of White. Estimates of value at risk with probability p for daily returns were computed using the best fitted copula model, from these value at risk, it is seen that SA/FTSE100 have the least risk while EGY/KEN has the highest risk. Prediction is given in terms of correlation and value at risk.

Highlights

The formation of regional bodies like African Union (AU), Economic Community of West African States (ECOWAS) does have political implications to the countries in question, but economic ones as well
There is a growing body of evidence that emerging market securities tend to offer larger returns with higher volatility compared to developed stock markets (e.g. Harvey [29], Bekaert et al [8], Bekaert and Harvey [7])
It is argued that the behavior of emerging markets is affected to a greater extent by local political, economic and social events rather than global events (e.g. Aggarwal et al [1], Bekaert and Harvey [7] and Susmel and Thompson [45]), more recent evidence has suggested that the diversification benefits of these markets have started to diminish because of changes in investment barriers for international investors (Errunza et al [22], Bekaert and Harvey [7])

Summary

Introduction

The formation of regional bodies like African Union (AU), Economic Community of West African States (ECOWAS) does have political implications to the countries in question, but economic ones as well. It is argued that the behavior of emerging markets is affected to a greater extent by local political, economic and social events rather than global events (e.g. Aggarwal et al [1], Bekaert and Harvey [7] and Susmel and Thompson [45]), more recent evidence has suggested that the diversification benefits of these markets have started to diminish because of changes in investment barriers for international investors (Errunza et al [22], Bekaert and Harvey [7])

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