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Long-term asset tail risks in developed and emerging markets

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  • Straetmans, Stefan
  • Candelon, Bertrand

Abstract

A 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.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Banking & Finance.

Volume (Year): 37 (2013)
Issue (Month): 6 ()
Pages: 1832-1844

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Handle: RePEc:eee:jbfina:v:37:y:2013:i:6:p:1832-1844

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Web page: http://www.elsevier.com/locate/jbf

Related research

Keywords: Tail index; Extreme value analysis; Endogenous stability test; Finite sample properties; Bootstrap;

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References

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Cited by:
  1. Aboura, Sofiane & Chevallier, Julien, 2014. "Volatility equicorrelation: A cross-market perspective," Economics Letters, Elsevier, vol. 122(2), pages 289-295.
  2. Tolikas, Konstantinos, 2014. "Unexpected tails in risk measurement: Some international evidence," Journal of Banking & Finance, Elsevier, vol. 40(C), pages 476-493.

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