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Is global diversification rational? Evidence from emerging equity markets through mixed copula approach

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In this article, we aim to model the level and structure of the dependence between the world's leading stock markets and those of the emerging market groups - Europe, Latin America and Far East. To this end we use a mixture model of Gaussian, Gumbel and Gumbel survival copulas. Our results indicate that none of the pairs of stock markets exhibit a right-tail dependence structure. All valid models exhibit a mixture of Gaussian and left-tail dependence structure. Our findings imply that Gaussian dependence structure is dominant in most of the models. The emerging equity markets in the European region exhibit the most significant dependence structure with the world leaders. Furthermore, most of the emerging equity markets have a significant dependence structure with the US stock market. We further compare our findings with the results of the conventional correlation coefficients and conclude the importance of using copula models in analysing the portfolio diversification opportunities. Our findings overall indicate two important remarks: First, the copula models reveal better indicators for global investors to establish a diversified portfolio; Second, international equity markets exhibit significant dependence, which leaves a smaller opportunity to benefit from international portfolio diversification.

Document Type: Research Article


Affiliations: 1: Faculty of Business, Department of Economics, Dokuz Eylul University, Buca, Izmir, Turkey 2: Faculty of Arts and Sciences, Department of Statistics, Dokuz Eylul University, Buca, Izmir, Turkey

Publication date: February 1, 2010

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