Extreme Dependence In The Nasdaq And S&P Composite Indexes
AbstractDependence among large observations in equity markets is usually examined using second-moment models such as those from the GARCH or SV classes. Such models treat the entire set of returns, and tend to produce very similar estimates on the major equity markets, with a sum of estimated GARCH parameters, for example, slightly below one. Using dependence measures from extreme value theory, however, it is possible to characterie dependence among only the largest (or largest negative) financial returns; these alternative characterizations of clustering have important applications in risk management. In this paper we compare the NASDAQ and degree of extreme dependence. Although GARCH-type characterizations of second-moment dependence in the two markets produce similar results, the same is not true in the extremes: we find significantly more extreme dependence in the NASDAQ returns. More generally, the study of extreme dependence may reveal contrasts which are obscured when examining the conditional second moment.
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.
Bibliographic InfoPaper provided by McGill University, Department of Economics in its series Departmental Working Papers with number 2006-14.
Length: 23 pages
Date of creation: Sep 2006
Date of revision:
Find related papers by JEL classification:
- G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
- G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
This paper has been announced in the following NEP Reports:
- NEP-ALL-2006-09-23 (All new papers)
- NEP-ETS-2006-09-23 (Econometric Time Series)
- NEP-FIN-2006-09-23 (Finance)
- NEP-FMK-2006-09-23 (Financial Markets)
- NEP-RMG-2006-09-23 (Risk Management)
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.:
- 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.
- John Galbraith & Serguei Zernov, 2002. "Circuit Breakers and the Tail Index of Equity Returns," CIRANO Working Papers 2002s-62, CIRANO.
- M. E. Robinson & J. A. Tawn, 2000. "Extremal analysis of processes sampled at different frequencies," Journal of the Royal Statistical Society Series B, Royal Statistical Society, vol. 62(1), pages 117-135.
- Huisman, Ronald, et al, 2001. "Tail-Index Estimates in Small Samples," Journal of Business & Economic Statistics, American Statistical Association, vol. 19(2), pages 208-16, April.
- Cotter, John, 2000.
"Margin Exceedences for European Stock Index Futures using Extreme Value Theory,"
3534, University Library of Munich, Germany, revised 2001.
- Cotter, John, 2001. "Margin exceedences for European stock index futures using extreme value theory," Journal of Banking & Finance, Elsevier, vol. 25(8), pages 1475-1502, August.
- Cotter, John, 2001. "Margin exceedences for European stock index futures using extreme value theory," Open Access publications from University College Dublin urn:hdl:10197/1620, University College Dublin.
- 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.
- 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.
- Phillip Kearns & Adrian Pagan, 1997. "Estimating The Density Tail Index For Financial Time Series," The Review of Economics and Statistics, MIT Press, vol. 79(2), pages 171-175, May.
- Christopher A. T. Ferro & Johan Segers, 2003. "Inference for clusters of extreme values," Journal of the Royal Statistical Society Series B, Royal Statistical Society, vol. 65(2), pages 545-556.
- Anthony W. Ledford & Jonathan A. Tawn, 2003. "Diagnostics for dependence within time series extremes," Journal of the Royal Statistical Society Series B, Royal Statistical Society, vol. 65(2), pages 521-543.
- Laurini Fabrizio, 2004. "Clusters of Extreme Observations and Extremal Index Estimate in GARCH Processes," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 8(2), pages 1-23, May.
- François Longin, 2001. "Extreme Correlation of International Equity Markets," Journal of Finance, American Finance Association, vol. 56(2), pages 649-676, 04.
- 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.
- Martins-Filho Carlos & Yao Feng, 2006. "Estimation of Value-at-Risk and Expected Shortfall based on Nonlinear Models of Return Dynamics and Extreme Value Theory," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 10(2), pages 1-43, May.
- Longin, Francois M., 2000. "From value at risk to stress testing: The extreme value approach," Journal of Banking & Finance, Elsevier, vol. 24(7), pages 1097-1130, July.
- Ferro, Christopher A. T., 2003. "Inference for clusters of extreme values," Open Access publications from UniversitÃ© catholique de Louvain info:hdl:2078/114575, Université catholique de Louvain.
- Huisman, Ronald & Koedijk, Kees G. & Kool, Clemens J.M. & Palm, Franz, 2001. "Tail-index estimates in small samples," Open Access publications from Maastricht University urn:nbn:nl:ui:27-5756, Maastricht University.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Shama Rangwala) The email address of this maintainer does not seem to be valid anymore. Please ask Shama Rangwala to update the entry or send us the correct address.
If references are entirely missing, you can add them using this form.