Subsample analysis of stock market – cryptocurrency returns tail dependence: A copula approach for the tails

This paper describes the extremal and tail dependence between G7 stock market returns (USA, Canada, UK, Japan, Germany, France, Italy) and cryptocurrency returns (Bitcoin, Ethereum, Dash, Monero, Ripple) on the basis of the bivariate extremal dependence model (Padoan and Stupfler, 2022) and the bivariate test for equality of tail copulas (Can et al., 2023). Over a daily data period from January 1, 2016 through January 5, 2023, the findings reveal significant differences in tail risk between the categories of G7 stock market returns and cryptocurrency returns, highlighting the need to find an appropriate asset to hedge individual financial asset tail risks. The results also demonstrate a time-invariant tail dependence between G7 stock market returns and cryptocurrency returns, as the Wald test supports the null of an equal tail dependence structure between stock market and cryptocurrency returns during both calm and crises times. The finding offer important policy implications for portfolio managers and investors.