Analyzing financial risk and co-movement of gold market, and Indonesian, Philippine, and Thailand stock markets: Dynamic copula with markov-switching

Abstract

In this paper, we analyze the dependency between the Thailand, Indonesia, and the Philippine (TIP) stock markets and gold markets using dynamic copula with the Markov-switching model with 2 regimes, namely high dependence and low dependence regimes, and extend the obtained correlation to measure the market risk. We are particularly interested in examining whether or not gold serves as a hedge in the TIP stock markets. Using daily data from January 2008 to November 2014, we find that the Gaussian copula identifies a long period of high dependence of TIPGOLD returns (market downturn) which coincides with the European debt crisis. However, if we do not take gold into account, the dependence between the TIP returns is lower in both regimes, thereby leading to a higher value at risk (VaR) and expected shortfall (ES). Therefore, gold can serve as a hedging, or a safe haven, for TIP stock markets during market downturns and upturns. Additionally, the Kupiec unconditional coverage and the Christoffersen conditional coverage test are conducted for VaR and ES backtesting. The results reveal that the Gaussian Markov-switching dynamic copula is the appropriate model to estimate a dynamic VaR and ES.