Dependence structure across equity sectors: Evidence from vine copulas

Understanding sectoral dynamic dependence across equity indexes is crucial for investment decisions and designing economic policy. This study examines the sectoral dependence among 82 Pakistani companies using a vine copula approach and daily data from July 1, 2014, to December 17, 2019. Vine copulas represent a flexible dependence approach capable of capturing the dynamic and complex relationships among equity sectors stemming from the nonlinear patterns of asymmetric behavior of returns that cannot be captured by linear dependence models. The results show that the Pakistani stock market is driven by the oil and gas marketing sector and oil and gas exploration sector, with high dependence on commercial banks, fertilizers, power generation and distribution, and automobile parts and accessories. The findings help explain the tail-dependence structure among equity stocks and sectors in the context of understudied emerging markets such as Pakistan, which is vital for portfolio management and designing sector-level policies.