AbstractWe introduce TailCoR, a new measure for tail correlation that is a function of linear and non-linear correlations, the latter characterized by the tail index. TailCoR can be exploited in a number of financial applications, such as portfolio selection where the investor faces risks of a linear and tail nature. Moreover, it has the following advantages: i) it is exact for any probability level as it is not based on tail asymptotic arguments (contrary to tail dependence coefficients), ii) it can be used in all tail scenarios (fatter, equal to or thinner than those of the Gaussian distribution), iii), it is distribution free, and iv) it is simple and no optimizations are needed. Monte Carlo simulations and calibrations reveal its goodness in finite samples. An empirical illustration using a panel of Euro area sovereign bonds shows that prior to 2009 linear correlations were in the vicinity of one and non-linear correlations were inexistent. Since the beginning of the crisis the linear correlations have decreased sharply, and non-linear correlations appeared and increased significantly in 2010-2011
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Bibliographic InfoPaper provided by ULB -- Universite Libre de Bruxelles in its series ULB Institutional Repository with number 2013/136238.
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Publication status: Published in: Journal of econometrics
Other versions of this item:
- C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
- C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
- G01 - Financial Economics - - General - - - Financial Crises
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