Dependence of Extreme Values, VaR, and Contagion During the COVID-19 Period: Analysis Using the Copula-GARCH Approach
Abstract
The present study investigates extreme co-movements and financial contagion across a broad set of global financial markets, including ten developed and emerging stock market indices, commodities (gold and oil), and cryptocurrencies (Bitcoin), over the period from January 2007 to May 2023. In the context of the increasing interconnectedness of global financial markets, it is imperative to comprehend the propagation of systemic shocks across asset classes for the purpose of effective risk management. In order to achieve this objective, a Copula-GARCH framework is employed, in which the Student’s t-copula is selected for its superior ability to capture nonlinear dependence and tail co-movements. The analysis compares dependence structures during the pre-crisis and the COVID-19 crisis periods. The present study diverges from the majority of previous research in its utilisation of a combined approach, integrating Copula-GARCH modelling with wavelet analysis. This novel method is employed to collectively examine tail dependence and multi-scale contagion dynamics, thereby facilitating a more comprehensive evaluation of financial interconnectedness during periods of market stress. The empirical evidence indicates significant and largely symmetric tail dependence across the majority of market pairs. This finding suggests the presence of stronger co-movements during periods of extreme market conditions, a phenomenon that was particularly evident throughout the course of the global pandemic. The robustness of these findings is further confirmed by wavelet analysis, which provides a multi-scale perspective on shock transmission across markets. The results demonstrate that financial contagion intensified during the pandemic, with important implications for international portfolio diversification and risk management. Furthermore, the role of gold as a potential safe-haven asset during periods of severe financial stress is highlighted, providing valuable insights for investors and policymakers.