APPLICATION OF GARCH-COPULA AND SEQUENCE ALIGNMENT METHOD ON THE MEASUREMENT OF DEPENDENCE BETWEEN TWO STOCKS DATA

• Main Author: PUTRI (10112015), FENATA
• Format: Final Project
• Language: Indonesia
• Online Access: https://digilib.itb.ac.id/gdl/view/22139
• Institution: Institut Teknologi Bandung

Measurement of the dependence between international stock market is important for investors to choose a couple of stocks for aportfolio and manage its risks. Measuring the dependence related to synchronizing two stocks market data which has different length because of different working days or national holidays across countries. This final project will used Sequence Alignment to synchronize two financial time series.This method has several stages.In first stage,returns will be modeled by AR(1)-GARCH(1,1)then normalized error will be estimated to determine the marginal distribution.In second stage,the joint probability function of marginal distributions is computed using Archimedean Copula. The joint probability function is then utilized as the scoring scheme for pairwise Sequence Alignment in third stage. Then,the data could be synchronized using Sequence Alignment method and aligned pairs of the data will be obtained.Finally,the rank correlation coefficient of the aligned pairs could be computed.The result show that the values of the rank correlation of Sequence Alignment based market pairs are higher thant hose of common synchronization method based market pairs.Thus,Sequence Alignment method could identify the optimal dependence that may be obtained from the two stocks market data.