The International Linkages and Transmission Patterns of G7 Equity Markets: A Vine Copula-Based Analysis
We employ both vine copula and the nonparametric approach by James and Matteson (2014b) to investigate the structure of linkages among the G7 equity markets in a time-varying manner from 3rd January 2000 through 14th June 2016. The estimation outcomes confirm the impact of the structural change point and show a higher degree of asymmetry and susceptibility in the dependence structure afterwards. While the United States and the United Kingdom are prone to originate shocks, France is the most susceptible to shocks and has been evaluated as the epicenter of the transmission pattern. Italy leaps ahead in the ordering and reflects its ascending vulnerability after the change point. Japan presents an effective hedge to the equity investments in the United States and Italy. In addition, Japan and Germany can serve as effective hedges to each other. Investments in both Japan and the United Kingdom can be profitable in a market boom. Finally, geographical proximity plays a significant role in determining the linkages.
Keywords - Vine copula; Multiple change point analysis; Linkage structure; Comovements.