Extremal Correlation for GARCH Data
AbstractThis paper introduces a nonparametric estimator for tail dependence in the constant conditional correlation GARCH framework, in contrast to existing estimators that impose the iid assumption. So long as stationarity is satisfied, the difference between the distribution of the tail dependence estimator under the iid and GARCH case is a scaling variance. Without the scaling variance, tests based on this estimator overreject the null of asymptotic tail dependence. An empirical application to tail dependence between emerging market bonds and equities shows that there is tail depenedence in their joint density even though the standard linear correlation coefficients indicate low correlation between assets. These findings and the methods introduced here have implications for risk management and portfolio allocation theory that are based on the standard correlation estimato
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Bibliographic InfoPaper provided by Econometric Society in its series Econometric Society 2004 North American Summer Meetings with number 87.
Date of creation: 11 Aug 2004
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GARCH; Extreme Value Theory;
Find related papers by JEL classification:
- C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models &bull Diffusion Processes
- G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
This paper has been announced in the following NEP Reports:
- NEP-ALL-2004-08-16 (All new papers)
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- Jonathan B. Hill, 2004. "Gaussian Tests of "Extremal White Noise" for Dependent, Heterogeneous, Heavy Tailed Time Series with an Application," Econometrics 0411014, EconWPA, revised 09 Dec 2004.
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