DYNAMIC COMOVEMENT OF BIST 100 WITH S&P 500 AND DAX 40: A STOCHASTIC COPULA APPROACH

This study examines the time-varying dependence between BIST 100 and two major developed markets, the DAX 40 and the S&P 500, over the period 2000–2025. To capture nonlinear and regime-dependent co-movement, a stochastic copula framework is employed in which the dependence parameter follows a latent autoregressive process. The analysis extends the baseline stochastic copula model by adopting heavy-tailed Student’s t marginal distributions, allowing for a more realistic representation of equity returns and improving inference during periods of extreme market movements. Empirical results indicate strong and highly persistent dependence between the BIST 100 and both developed indices, with pronounced amplification during global stress episodes such as the 2008 Global Financial Crisis and the COVID-19 shock. Across market pairs, Frank and Gumbel copulas provide the best overall fit, suggesting that dependence is not solely driven by crash-specific tail clustering but reflects a combination of persistent integration and stronger co-movement during large joint market movements. To evaluate economic significance, equally weighted international portfolios are constructed and assessed using Value-at-Risk, Expected Shortfall, variance reduction, and maximum drawdown. The portfolio evidence shows that diversification benefits are substantial in tranquil periods but deteriorate sharply during crisis regimes, with negative variance reduction observed during COVID-19, indicating diversification failure when global risk factors dominate. Overall, the findings highlight the importance of modeling dynamic, tail-sensitive dependence to understand Turkey’s integration with developed markets and to assess the fragility of international diversification under systemic stress.