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Extreme Dependence In The Nasdaq And S&P Composite Indexes

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Author Info
John G. Galbraith ()
Serguei Zernov ()

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Abstract

Dependence 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.

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Paper provided by McGill University, Department of Economics in its series Departmental Working Papers with number 2006-14.

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Length: 23 pages
Date of creation: Sep 2006
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Handle: RePEc:mcl:mclwop:2006-14

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G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation

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  2. repec:bep:sndecm:10:2006:2:1304-1304 is not listed on IDEAS
  3. 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.
  4. repec:bep:sndecm:8:2004:2:1225-1225 is not listed on IDEAS
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  6. François Longin, 2001. "Extreme Correlation of International Equity Markets," Journal of Finance, American Finance Association, vol. 56(2), pages 649-676, 04. [Downloadable!] (restricted)
  7. John W. Galbraith, 2004. "Circuit Breakers and the Tail Index of Equity Returns," Journal of Financial Econometrics, Oxford University Press, vol. 2(1), pages 109-129. [Downloadable!] (restricted)
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  8. 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. [Downloadable!] (restricted)
  9. 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. [Downloadable!] (restricted)
  10. 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. [Downloadable!] (restricted)
  11. 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. [Downloadable!] (restricted)
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  12. 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. [Downloadable!] (restricted)
  13. Longin, Francois M, 1996. "The Asymptotic Distribution of Extreme Stock Market Returns," Journal of Business, University of Chicago Press, vol. 69(3), pages 383-408, July. [Downloadable!] (restricted)
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