Modeling joint distribution of national stock indices

Article type: Research Article

Authors: Kangina, Nataliya^a | Knyazev, Alexander^a | Lepekhin, Oleg^a | Shemyakin, Arkady^{b; *}

Affiliations: [a] Astrakhan State University, Russia | [b] University of St. Thomas, MN, USA

Correspondence: [*] Corresponding author: Arkady Shemyakin, University of St. Thomas, MN, USA. E-mail:a9shemyakin@stthomas.edu

Abstract: This paper discusses the practical aspects of modeling the structure of dependence of national stock indices based on copula functions. An approach is proposed to identify groups of stock markets with homogeneous dynamics and to select typical representatives within these groups. It can be used as a preliminary step to build multivariate copula models as it rationalizes the criteria and principles for selection of national stock indices. Constructed model of the joint distribution of indices is used to estimate the probability of crisis events and to demonstrate the benefits of diversification.

Keywords: Stock markets, diversification, optimal portfolio, copula, cluster analysis, the principal components method, Metropolis-Hastings algorithm

DOI: 10.3233/MAS-150350

Journal: Model Assisted Statistics and Applications, vol. 11, no. 1, pp. 15-26, 2016