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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.

Suggested Citation

  • Straetmans, Stefan & Candelon, Bertrand, 2013. "Long-term asset tail risks in developed and emerging markets," Journal of Banking & Finance, Elsevier, vol. 37(6), pages 1832-1844.
  • Handle: RePEc:eee:jbfina:v:37:y:2013:i:6:p:1832-1844
    DOI: 10.1016/j.jbankfin.2012.09.022
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Aboura, Sofiane & Chevallier, Julien, 2014. "Cross-market spillovers with ‘volatility surprise’," Review of Financial Economics, Elsevier, vol. 23(4), pages 194-207.
    2. Christiansen, Charlotte, 2014. "Classifying returns as extreme: European stock and bond markets," International Review of Financial Analysis, Elsevier, vol. 34(C), pages 1-4.
    3. Aboura, Sofiane & Chevallier, Julien, 2014. "Volatility equicorrelation: A cross-market perspective," Economics Letters, Elsevier, vol. 122(2), pages 289-295.
    4. Aboura, Sofiane & Chevallier, Julien, 2015. "Volatility returns with vengeance: Financial markets vs. commodities," Research in International Business and Finance, Elsevier, vol. 33(C), pages 334-354.
    5. repec:dau:papers:123456789/13359 is not listed on IDEAS
    6. Tolikas, Konstantinos, 2014. "Unexpected tails in risk measurement: Some international evidence," Journal of Banking & Finance, Elsevier, vol. 40(C), pages 476-493.
    7. repec:ipg:wpaper:2014-469 is not listed on IDEAS
    8. Riedel, Christoph & Wagner, Niklas, 2015. "Is risk higher during non-trading periods? The risk trade-off for intraday versus overnight market returns," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 39(C), pages 53-64.

    More about this item

    Keywords

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

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G19 - Financial Economics - - General Financial Markets - - - Other
    • C49 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Other

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