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Empirical estimation of tail dependence using copulas: application to Asian markets

  • Cyril Caillault
  • Dominique Guegan

This paper introduces non-parametric estimators for upper and lower tail dependence whose confidence intervals are obtained with a bootstrap method. We call these estimators 'naive estimators' as they represent a discretization of Joe's formulae linking copulas to tail dependence. We apply the methodology to an empirical data set composed of three composite indexes for the three Tigers (Thailand, Malaysia and Indonesia). The extremes show a dependence structure which is symmetric for the Thai and Malaysian markets and asymmetric for the Thai and Indonesian markets and for the Malaysian and the Indonesian markets. Using these results we estimate the copula (which belongs to the Student or Archimedean copula families) for each pair of markets by two methods. Finally, we provide risk measurements using the best copula associated with each pair of markets.

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Article provided by Taylor & Francis Journals in its journal Quantitative Finance.

Volume (Year): 5 (2005)
Issue (Month): 5 ()
Pages: 489-501

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Handle: RePEc:taf:quantf:v:5:y:2005:i:5:p:489-501
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  1. Y. Malevergne & D. Sornette, 2001. "Testing the Gaussian Copula Hypothesis for Financial Assets Dependences," Finance 0111003, EconWPA.
  2. W. Breymann & A. Dias & P. Embrechts, 2003. "Dependence structures for multivariate high-frequency data in finance," Quantitative Finance, Taylor & Francis Journals, vol. 3(1), pages 1-14.
  3. Yannick Malevergne & Didier Sornette, 2003. "Testing the Gaussian copula hypothesis for financial assets dependences," Post-Print hal-00520539, HAL.
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