Multivariate Financial Dependence Analysis of Asian Markets Using Vine Copulas

Modelling financial dependence is one of the major areas of research in quantitative finance and econometrics. Efficient quantification of dependence is desirable for portfolio theory, hedging, valuation of assets and risk management in general. Quantification of co-movement or multivariate dependence between various international stock markets results in better diversification which benefits investors as it helps in profitable risk distribution. Due to their phenomenal growth in recent years, Asian stock markets have become important for global investors. The study of dependence among Asian stock markets has gained importance as these markets promise diversification benefits. In this paper we study the multivariate dependence structure of eleven Asian financial markets, including Thailand, Malaysia, Indonesia, Singapore, Philippines, Korea, Japan, China, Hong Kong, Taiwan, and India using sophisticated and recently developed model, Regular Vine (R-Vine) Copula. R-Vine Copulas constitute a flexible kind of multivariate dependence models which offer more flexibility than standard multivariate copulas. We also introduce the international markets of Australia, UK and US to the dependence analysis in order to study the influence of these international stock markets on the Asian markets.