Dependence Between BRICS Stock Markets Based on Factor Hidden Markov Copula Model
In order to investigate the impact of significant economic or political events on the dependence of financial markets,we construct the factorial hidden Markov Copula model(FHM-Copula)that allows the coefficients of dependence to follow a regime-switching process in high-dimensional state space.The FHM-Copula model is able to capture external shocks of varying magnitude,direction,duration,and short or long-term from significant events to the dependence.In the empirical study,we analyze the dynamic dependence between the stock markets of China and other BRICS countries by adopting the FHM-Copula approach.Our findings indicate that the FHM-Copula model can effectively identify the external shocks caused by significant events such as the subprime crisis,the European debt crisis,the Chinese stock market crash,China's taking over the BRICS presidency and the COVID-19 epidemic on the dependence between the stock markets of China and other BRICS countries.Our works not only provide a theoretical analysis framework based on the information shock perspective for the study of dynamic dependence among financial variables,but also provide a reference for investors and government regulators in investment decisions and risk management.
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