Analyzing the dependence structure of various sectors in the Brazilian market: A Pair Copula Construction approach

- We estimate the dependence structure of economic sectors through PCC in Brazil.
- We identify the conditional evolution of the volatilities of the studied indices.
- There is predominance of the student's t copula in the relationships.
- We identify dynamic behavior in portfolio risk management.

In this paper we estimate the dependence structure between economic sectors in the Brazilian financial market through Pair Copula Construction. We use daily data from indices which represent telecommunications, energy, industrials, consumer, financial, basic materials and real estate sectors in BM&F/Bovespa. Results indicate predominance of student's t copula in structure. BB1, BB7, BB8, Frank and Joe copulas also fit into some relationships. Regarding dependence, tail measures obtain relevant values in most relationships. Lower tail dependence exceeds absolute, measured by Kendall's Tau, and upper tail in many cases, reflecting the asymmetry in some relationships. Further, in order to give robustness to these results, we forecast daily Value at Risk, considering distinct significance levels, of a portfolio composed of studied sectors through the estimated structure. Results allow one to conclude that VaR predictions are correct. These results permit business industry participants to construct portfolios with assets of these sectors under a proper diversification structure. Moreover, from an international point of view, investors who are interested in diversification could perform more sophisticated strategies in this country rather than simply trading the index.