Using unconditional and conditional copulas, this paper investigates pair-wise extreme dependence across equity markets and currency markets by directly modeling the tail dependence behavior. Empirically, we find significant asymmetric tail dependence in equity markets, with a large lower tail dependence coefficient than upper tail dependence coefficient, implying that international diversification is limited since the equity pairs tend to crash together when diversification is most needed. Mixed results are found for currency co-movements. Co-movements in the currency markets are much weaker, in several cases, with larger upper tail coefficients. This study has important implications in portfolio selection and risk management strategies in international diversification.
Fangxia Lin. "Extreme Dependence Across East Asian Financial Markets: Evidence in Equity and Currency Markets." Proceedings of the New York State Economics Association. vol. 6, October 2013, p. 109-121
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