Abstract
We study the dependence structure of share price returns among the Beijing Bank, Ningbo Bank, and Nanjing Bank using copula models. We use the normal, Student’s t, rotated Gumbel, and symmetrized Joe-Clayton (SJC) copula models to estimate the underlying dependence structure in two periods: one covering the global financial crisis and the other covering the domestic share market crash in China. We show that Beijing Bank is less dependent on the other two city banks than Nanjing Bank, which is dependent on the other two in share price extreme returns. We also observe a major decrease of dependency from 2007 to 2018 in three one-to-one dependence structures. Interestingly, contrary to recent literatures, Ningbo Bank and Nanjing Bank tend to be more dependent on each other in positive returns than in negative returns during the past decade. We also show the dynamic dependence structures among three city banks using time-varying copula.
Highlights
Research on the co-movement among financial asset returns has tended to focus more on tail dependence rather than linear correlation, as the former can capture the dependence structure in a period with extreme events
The second contribution is that we examined the changes in dependence structure of the daily share price returns between the Beijing Bank, Ningbo Bank, and Nanjing Bank
For analyzing the time-varying dependence strength, we considered using the rotated Gumbel and Student’s t copula models with the generalized autoregressive score (GAS) model introduced by Creal et al (2013)
Summary
Research on the co-movement among financial asset returns has tended to focus more on tail dependence rather than linear correlation, as the former can capture the dependence structure in a period with extreme events (boom or crash). Research on tail dependence has shown that for most financial asset returns, there is more dependence during a crash than during boom periods (see, for example, (Ang and Chen 2002)). Potential asymmetric characteristics exist in the tail dependence structure. As shown first by Patton (2006), some exchange rate returns exhibit asymmetric tail dependence. These results relating to tail dependence aroused our interest in the asymmetry in tail dependence
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