Tail Dependence Study of SSE Composite Index and SZSE Component Index Based on the Copula

Guohua Sun,Hongliu Su,Guoqiang Tang

doi:10.4236/am.2013.47145

Abstract

With the rapid development of financial industry, copula methods are more and more widely used for the study of financial fields. By selecting the appropriate copulas, the tail dependence of financial variables can be measured easily. Using the nonparametric estimation method to select A12 copula from Archimedean copulas, and do tail dependence study of SSE composite index and SESE component index. The results show that the SSE composite index and SESE component index simultaneously have the upper tail dependence and lower tail dependence, and the upper tail dependence coefficient is less than the lower tail dependence coefficient, which is consistent with the real financial market rule.

Highlights

With the continuous development of the financial markets, the relationship of interior financial markets is more and more complex, it will promote the study of dependence between financial market structure
The results show that the SSE composite index and SESE component index simultaneously have the upper tail dependence and lower tail dependence, and the upper tail dependence coefficient is less than the lower tail dependence coefficient, which is consistent with the real financial market rule
Because the A12 copula of Archimedean copulas has both upper tail and lower tail dependence, we choose A12 copula to study for tail dependence, we should do the test for the selected copula functions

Summary

Introduction

With the continuous development of the financial markets, the relationship of interior financial markets is more and more complex, it will promote the study of dependence between financial market structure. Marginal distribution often do not have the same type of distribution, this makes the traditional multivariate distribution functions can not be widely used in the dependence analysis of financial markets. In this paper we use copula functions to study the tail dependence between SSE composite index and SZSE component index. At present, using copula function to study the dependence of the financial market already had many achievements, and in many domestic and foreign literatures, most of them used parameter estimation method to estimate parameters of copula functions. The innovation of this paper is to use a parameter estimation method for parameter estimation, to determine copula functions, and to do the test of tail dependence

Selecting Copulas and Estimating Parameters

The Introduction of Three Types of Copulas

Estimating with Nonparametric Estimation

Testing for Copulas

A12 Copula

Conclusion