Abstract:
Dependence structure of nancial market is crucial in determining investment po-
sitions and strategies to reduce nancial market risk. Linear correlation model is
not suitable to capture asymmetries and dependence structure of nancial market
as the only capture the degree of correlation. In order to address the problem, the
study estimates dependence structure between nancial markets using the copula
concept. Di erent relationships that exist in normal and extreme periods were
estimated using copula. The Inference Functions for Margins method was used in
estimating copula parameter thereby obtaining dependence estimates. The study
show analytically how dependence estimates are imputed into Value-at-Risk. The
Inference Function for Margin estimator was found to be consistent and asymp-
totically normal. From the empirical ndings, to diversify market risk during the
crisis period (2007-2009) the market pairs with the highest maximum possible
loss is evident in the stock market and followed by the stock market-Tbills pairs.
However, the less risk portfolio is the stock-bond. As bonds are nancially con-
sidered as safer investments over time, implies that investment in a stock-bond
portfolio is less risky during the crisis period.
