Abstract:
Dependence between financial variables is a key consideration for portfolio
diversification and risk management. Linear correlation as a measure of
dependence is inadequate in capturing dependence of financial variables. In this
paper we apply the semi parametric copula based multivariate dynamical model to
estimate dependence structure between the equity and foreign exchange markets
in Kenya. Several parametric copula models are fitted into the data and their
performance in capturing the dependence compared. We find that there exists
significant symmetric dependence between the variable. Besides, we find
evidence of tail dependence amongst the variables. The findings of this paper are
significant to global investors in their pursuit to diversify their portfolios and
manage their risks.
