A vine copula approach for analyzing financial risk and co-movement of the Indonesian, Philippine and Thailand stock markets

Abstract

This paper aims at analyzing the financial risk and co-movement of stock markets in three countries: Indonesia, Philippine and Thailand. It consists of analyzing the conditional volatility and test the leverage effect in the stock markets of the three countries. To capture the pairwise and conditional dependence between the variables, we use the method of vine copulas. In addition, we illustrate the computations of the value at risk and the expected shortfall using Monte Carlo simulation with copula based GJR-GARCH model. The empirical evidence shows that all the leverage effects add much to the capacity for explanation of the three stock returns, and that the D-vine structure is more appropriate than the C-vine one for describing the dependence of the three stock markets. In addition, the value at risk and ES provide the evidence to confirm that the portfolio may avoid risk in significant measure. © Springer International Publishing Switzerland 2014.