Dependence Analysis of Chinese Financial Markets with Copula

With the development of the financial globalization, the co-movement among financial markets strengthens, and dependence plays a central role in financial theory. Recently, copula function has become an important alternative to modeling dependence in financial field. This paper analyzes the dependence between SHECI and SZECI in China. We use the canonical maximum likelihood method (CML) to estimate the unknown parameters of the 8 candidate copulas, and select the rotated Gumbel copula with Akaike information criterion (AIC). The chi(2) test confirms that rotated Gumbel copula is a fitting copula. We also use time-varying rotated Gumbel copula to analyze the dependence. The result shows that SHECI and SZECI have strong lower-tail dependence, and the dependence has a trend of rise.