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Measuring large comovements in financial markets


  • Jeremy Penzer
  • Friedrich Schmid
  • Rafael Schmidt


A general, copula-based framework for measuring the dependence among financial time series is presented. Particular emphasis is placed on multivariate conditional Spearman's rho (MCS), a new measure of multivariate conditional dependence that describes the association between large or extreme negative returns—so-called tail dependence. We demonstrate that MCS has a number of advantages over conventional measures of tail dependence, both in theory and in practical applications. In the analysis of univariate financial series, data are filtered to remove temporal dependence as a matter of routine. We show that standard filtering procedures may strongly influence the conclusions drawn concerning tail dependence. We give empirical applications to two large data sets of high-frequency asset returns. Our results have immediate implications for portfolio risk management, derivative pricing and portfolio selection. In this context we address portfolio tail diversification and tail hedging. Amongst other aspects, it is shown that the proposed modeling framework improves the estimation of portfolio risk measures such as the value at risk.

Suggested Citation

  • Jeremy Penzer & Friedrich Schmid & Rafael Schmidt, 2012. "Measuring large comovements in financial markets," Quantitative Finance, Taylor & Francis Journals, vol. 12(7), pages 1037-1049, November.
  • Handle: RePEc:taf:quantf:v:12:y:2012:i:7:p:1037-1049
    DOI: 10.1080/14697688.2010.495950

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