Dependence structure between the BRICS foreign exchange and stock markets using the dependence-switching copula approach

摘要

We examine the dependence structure between the BRICS stock and foreign exchange markets using a dependence-switching copula model. In particular, we examine dependence and tail dependence for four different market conditions, namely rising stock-appreciating currency, falling stock-depreciating currency, rising stock-depreciating currency and falling stock-appreciating currency. Our results indicate that dependence and tail dependence in the four market conditions are symmetric for all countries except Russia during negative correlation regimes. During positive correlation regimes, dependencies generally asymmetric but tail dependence is symmetric for all countries. The results further suggest the dominance of return chasing effects for India, Brazil and South Africa, and portfolio rebalancing effects for China and Russia most of the time. We further show that the co-dependencies computed using R-vine copulas are best suited to compute the portfolio VaR during the considered time period.