Dependence structure between index stock market and bitcoin using time-varying copula and extreme value theory

Abstract

Dependence structure between financial assets plays an important role in risk management. This research investigates the dependence pattern between the stock market and the potential of cryptocurrency. We employed time- varying copula and Extreme Value Theory (EVT) to model the extreme dependence between the United States (US) index stock market (S&P500) and Bitcoin. Empirical results show risk diversification for holdings of the S&P500 and Bitcoin during extreme events seem to be effective. This paper contributes to a better understanding of the dependence structure of the financial market during extreme events. This information is useful for investors who are seeking for the cross-market diversification.