Extreme Dependence of International Stock Markets

Using copulas, in this paper we investigate the static and dynamic extreme dependence of international stock markets. We examine both the structure and the degree of the dependence. The data set are daily returns on the stock indices from countries in North America, Europe and East Asia. The results show signi…cant asymmetric tail dependence in most of the return pairs, with the overall lower tail dependence being greater than the upper tail dependence. Moreover,in Europe and East Asia but not in North America, the dependence is time-varying in both its structure and degree . Our results also indicate that the dependence is higher between market pairs from the same continent than from di¤erent continents. Our …ndings have important implications in global …nancial risk management. JEL classi…cation: C14, C51, G15, G32 Keywords: Copulas; Tail dependence; Time varying dependence; International …nancial markets; Risk diversi…cation.