Modelling Dependencies of Stock Indices During Covid-19 Pandemic by Extreme-Value Copula

Retno Budiarti; Kumala Intansari; I Gusti Putu Purnaba; Fendy Septyanto

doi:10.31764/jtam.v7i3.15109

Modelling Dependencies of Stock Indices During Covid-19 Pandemic by Extreme-Value Copula

Retno Budiarti, Kumala Intansari, I Gusti Putu Purnaba, Fendy Septyanto

Abstract

Quantifying dependence among variables is the core of all modelling efforts in financial models. In the recent years, copula was introduced to model the dependence structure among financial assets return, and its application developed fast. A large number of studies on copula have been performed, but the study of multivariate extremes related with copulas was quite behind in comparison with the research on copulas. The COVID-19 pandemic is an extreme event that has caused the collapse of various economic activities which resulted in the decline of stock prices. The modelling of extreme events is therefore important to mitigate huge financial losses. Extreme-value copula can be suitable to quantify dependencies among assets under an extreme event. In this paper, we study the modelling of extreme value dependence using extreme value copulas on finance data. This model was applied in the portfolio of the IDX Composite Index (IHSG), Straits Times Index (STI) and Kuala Lumpur Stock Exchange (KLSE). Each individual asset return is modelled by the ARMA-GARCH and the joint distribution is modelled using extreme value copulas. This empirical study showed that Gumbel copula is the most appropriate extreme value copulas for the three indices. The results of this study are expected to be used as a basis for investors in the formation of a portfolio consisting of 2 financial assets and a portfolio consisting of 3 financial assets.

Keywords

ARMA-GARCH; Copula; Extreme Value Copula; Covid-19; Composite Index.

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DOI: https://doi.org/10.31764/jtam.v7i3.15109