On Mathematical Modeling and Analysis of Co-Movement and Optimal Portfolios of Stock Markets

Panisara Phochanachan, Jianxu Liu, Songsak Sriboonchitta


This paper proposes to use the concept of time-varying copulas in probability theory as an appropriate mathematical modeling tool for investigating an important problem in economics, namely the co-movement of stock markets as well as optimal portfolio constructions on them. In the sense of expected shortfall, a coherent risk measure widely used in risk management of financial markets, we show that our time-varying copula models for GARCH perform better than the conventional DCC-GARCH model. We exhibit also various advantages of this approach in investment decisions. An application to G7 stock markets is given.

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|ISSN 1686-0209|