Long-term asset tail risks in developed and emerging markets
AbstractA power law typically governs the tail decay of financial returns but the constancy of the so-called tail index which dictates the tail decay remains relatively unexplored. We study the finite sample properties of some recently proposed endogenous tests for structural change in the tail index. Given that the finite sample critical values strongly depend on the tail parameters of the return distribution we propose a bootstrap-based version of the structural change test. Our empirical application spans developed and emerging financial asset returns. Somewhat surprisingly, emerging stock market tails are not more inclined to structural change than their developed counterparts. Emerging currency tails, on the contrary, do exhibit structural shifts in contrast to developed currencies. Our results suggest that extreme value theory (EVT) applications in hedging tail risks can assume stationary tail behavior over long time spans provided one considers portfolios that solely consist of stocks or bonds.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Bibliographic InfoArticle provided by Elsevier in its journal Journal of Banking & Finance.
Volume (Year): 37 (2013)
Issue (Month): 6 ()
Contact details of provider:
Web page: http://www.elsevier.com/locate/jbf
Tail index; Extreme value analysis; Endogenous stability test; Finite sample properties; Bootstrap;
Find related papers by JEL classification:
- F31 - International Economics - - International Finance - - - Foreign Exchange
- G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
- G19 - Financial Economics - - General Financial Markets - - - Other
- C49 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Other
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Upper, Christian & Werner, Thomas, 2002.
"Time variation in the tail behaviour of bunds futures returns,"
Working Paper Series
0199, European Central Bank.
- Upper, Christian & Werner, Thomas, 2002. "Time Variation in the Tail Behaviour of Bund Futures Returns," Discussion Paper Series 1: Economic Studies 2002,25, Deutsche Bundesbank, Research Centre.
- Longin, Francois M, 1996. "The Asymptotic Distribution of Extreme Stock Market Returns," The Journal of Business, University of Chicago Press, vol. 69(3), pages 383-408, July.
- Hols, Martien C A B & de Vries, Casper G, 1991. "The Limiting Distribution of Extremal Exchange Rate Returns," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 6(3), pages 287-302, July-Sept.
- Candelon, Bertrand & Straetmans, Stefan, 2006. "Testing for multiple regimes in the tail behavior of emerging currency returns," Journal of International Money and Finance, Elsevier, vol. 25(7), pages 1187-1205, November.
- Danielsson, J. & de Haan, L. & Peng, L. & de Vries, C. G., 2001.
"Using a Bootstrap Method to Choose the Sample Fraction in Tail Index Estimation,"
Journal of Multivariate Analysis,
Elsevier, vol. 76(2), pages 226-248, February.
- J. Danielsson & L. de Haan & L. Peng & C.G. de Vries, 1997. "Using a Bootstrap Method to choose the Sample Fraction in Tail Index Estimation," Tinbergen Institute Discussion Papers 97-016/4, Tinbergen Institute.
- Koedijk, C.G. & Schafgans, M.M.A. & Vries, C.G. de, 1990. "The tail index of exchange rate returns," Open Access publications from Tilburg University urn:nbn:nl:ui:12-3108722, Tilburg University.
- Andersen, Torben G. & Bollerslev, Tim, 1997. "Intraday periodicity and volatility persistence in financial markets," Journal of Empirical Finance, Elsevier, vol. 4(2-3), pages 115-158, June.
- John Galbraith & Serguei Zernov, 2002.
"Circuit Breakers and the Tail Index of Equity Returns,"
CIRANO Working Papers
- John W. Galbraith, 2004. "Circuit Breakers and the Tail Index of Equity Returns," Journal of Financial Econometrics, Society for Financial Econometrics, vol. 2(1), pages 109-129.
- Donald W.K. Andrews, 1990.
"Tests for Parameter Instability and Structural Change with Unknown Change Point,"
Cowles Foundation Discussion Papers
943, Cowles Foundation for Research in Economics, Yale University.
- Andrews, Donald W K, 1993. "Tests for Parameter Instability and Structural Change with Unknown Change Point," Econometrica, Econometric Society, vol. 61(4), pages 821-56, July.
- Dennis Jansen & Casper de Vries, 1988.
"On the frequency of large stock returns: putting booms and busts into perspective,"
1989-006, Federal Reserve Bank of St. Louis.
- Jansen, Dennis W & de Vries, Casper G, 1991. "On the Frequency of Large Stock Returns: Putting Booms and Busts into Perspective," The Review of Economics and Statistics, MIT Press, vol. 73(1), pages 18-24, February.
- ROCKINGER, Michael & JONDEAU, Eric, 2001.
"Testing for differences in the tails of stock-market returns,"
Les Cahiers de Recherche
739, HEC Paris.
- Jondeau, Eric & Rockinger, Michael, 2003. "Testing for differences in the tails of stock-market returns," Journal of Empirical Finance, Elsevier, vol. 10(5), pages 559-581, December.
- Candelon, Bertrand & Lütkepohl, Helmut, 2000.
"On the reliability of chow type test for parameter constancy in multivariate dynamic models,"
SFB 373 Discussion Papers
2000,95, Humboldt University of Berlin, Interdisciplinary Research Project 373: Quantification and Simulation of Economic Processes.
- Candelon, Bertrand & Lutkepohl, Helmut, 2001. "On the reliability of Chow-type tests for parameter constancy in multivariate dynamic models," Economics Letters, Elsevier, vol. 73(2), pages 155-160, November.
- P. Hartmann & S. Straetmans & C. G. de Vries, 2004.
"Asset Market Linkages in Crisis Periods,"
The Review of Economics and Statistics,
MIT Press, vol. 86(1), pages 313-326, February.
- de Vries, Casper G & Hartmann, Philipp & Straetmans, Stefan, 2001. "Asset Market Linkages in Crisis Periods," CEPR Discussion Papers 2916, C.E.P.R. Discussion Papers.
- Hartmann, P. & Straetmans, S. & De Vries, C.G., 2001. "Asset Market Linkages in Crisis Periods," Papers 71, Quebec a Montreal - Recherche en gestion.
- Hartmann, Philipp & Straetmans, Stefan & de Vries, Casper, 2001. "Asset market linkages in crisis periods," Working Paper Series 0071, European Central Bank.
- P. Hartmann & S. Straetmans & C.G. de Vries, 2001. "Asset Market Linkages in Crisis Periods," Tinbergen Institute Discussion Papers 01-071/2, Tinbergen Institute.
- Benoit Mandelbrot, 1963. "The Variation of Certain Speculative Prices," The Journal of Business, University of Chicago Press, vol. 36, pages 394.
- Pagan, Adrian R. & Schwert, G. William, 1990. "Testing for covariance stationarity in stock market data," Economics Letters, Elsevier, vol. 33(2), pages 165-170, June.
- Jansen, Dennis W. & Koedijk, Kees G. & de Vries, Casper G., 2000. "Portfolio selection with limited downside risk," Journal of Empirical Finance, Elsevier, vol. 7(3-4), pages 247-269, November.
- Quintos, Carmela & Fan, Zhenhong & Phillips, Peter C B, 2001. "Structural Change Tests in Tail Behaviour and the Asian Crisis," Review of Economic Studies, Wiley Blackwell, vol. 68(3), pages 633-63, July.
- S. T. M. Straetmans & W. F. C. Verschoor & C. C. P. Wolff, 2008. "Extreme US stock market fluctuations in the wake of 9|11," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 23(1), pages 17-42.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Zhang, Lei).
If references are entirely missing, you can add them using this form.