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Study of the Tail Dependence Structure in Global Financial Markets Using Extreme Value Theory


  • Jian Wu
  • Zhengjun Zhang

    () (University of Wisconsin)

  • Yong Zhao


The presence of tail dependencies invalidates the multivariate normality assumptions in portfolio risk management. The identification of tail (in)dependencies has drawn major attention in empirical financial studies. Yet it is still a challenging issue both theoretically and practically. Previous studies based on either a restrictive model or the null hypothesis of tail (perfect) dependence does not well describe or interpret extreme co-movements in financial markets. This paper examines tail dependence structures underlying a broad range of financial asset classes employing the newly developed tail quotient correlation coefficients. In theory, the original tail quotient correlation coefficient proposed in (Zhang 2008) is adapted to incorporate cases with varying data driven random thresholds. Our empirical results demonstrate different tail dependence structures underlying various global financial markets. Either omission or unanimous treatment of the tail dependence structures for different financial markets will lead to erroneous conclusions or suboptimal investment choices. The multivariate extreme value theory framework in this study has the potential to serve as an useful tool in exploiting arbitrage opportunities, optimizing asset allocations, and building robust risk management strategies

Suggested Citation

  • Jian Wu & Zhengjun Zhang & Yong Zhao, 2012. "Study of the Tail Dependence Structure in Global Financial Markets Using Extreme Value Theory," Journal of Reviews on Global Economics, Lifescience Global, vol. 1, pages 62-81.
  • Handle: RePEc:lif:jrgelg:v:1:y:2012:p:62-81

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    Tail dependence; Testing (tail) independence; Extreme value theory; Varying threshold values; Risk analysis;

    JEL classification:

    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
    • C4 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)


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