Cointegration and Extreme Value Analyses of Bovespa and Istanbul Stock Exchanges

This paper investigates the long-term financial integration and bivariate extreme dependency between Bovespa and Istanbul Stock Exchanges. While static cointegration test present no evidence of long term cointegration, introduction of a structural break to the model shows that Bovespa and ISE cointegrated following the local crisis of Turkey in 2000. Dynamic cointegration tests and DCC-GARCH analysis also reveal that Bovespa and ISE reacted strongly not only to systemic-wide crisis as expected but also unexpectedly to unsystemic crisis in each other. This shows that equity prices in two emerging markets in distant regions of the world can co-move in the absence of significant trade and financial linkages. This suggests that there are other underlying processes that affect equity prices other than trade, financial linkages, macro economic ties or FDI as prior literature suggests. We also show that the extremes of these markets still possess asymptotic independency suggesting diversification opportunities