IDEAS home Printed from https://ideas.repec.org/p/boe/boeewp/0815.html
   My bibliography  Save this paper

Tail risk interdependence

Author

Listed:
  • Polanski, Arnold

    () (University of East Anglia)

  • Stoja, Evarist

    () (University of Bristol)

  • Chiu, Ching-Wai (Jeremy)

    () (Bank of England)

Abstract

We present a framework focused on the interdependence of high-dimensional tail events. This framework allows us to analyse and quantify tail interdependence at different levels of extremity, decompose it into systemic and residual part and to measure the contribution of a constituent to the interdependence of a system. In particular, tail interdependence can capture simultaneous distress of the constituents of a (financial or economic) system and measure its systemic risk. We investigate systemic distress in several financial datasets confirming some known stylized facts and discovering some new findings. Further, we devise statistical tests of interdependence in the tails and outline some additional extensions.

Suggested Citation

  • Polanski, Arnold & Stoja, Evarist & Chiu, Ching-Wai (Jeremy), 2019. "Tail risk interdependence," Bank of England working papers 815, Bank of England.
  • Handle: RePEc:boe:boeewp:0815
    as

    Download full text from publisher

    File URL: https://www.bankofengland.co.uk/-/media/boe/files/working-paper/2019/tail-risk-interdependence.pdf
    File Function: Full text
    Download Restriction: no

    References listed on IDEAS

    as
    1. Andrew Ang & Geert Bekaert, 2002. "International Asset Allocation With Regime Shifts," Review of Financial Studies, Society for Financial Studies, vol. 15(4), pages 1137-1187.
    2. Dong Hwan Oh & Andrew J. Patton, 2017. "Modeling Dependence in High Dimensions With Factor Copulas," Journal of Business & Economic Statistics, Taylor & Francis Journals, vol. 35(1), pages 139-154, January.
    3. Liangjun Su & Martin Spindler, 2013. "Nonparametric Testing for Asymmetric Information," Journal of Business & Economic Statistics, Taylor & Francis Journals, vol. 31(2), pages 208-225, April.
    4. Allen, Franklin & Babus, Ana & Carletti, Elena, 2012. "Asset commonality, debt maturity and systemic risk," Journal of Financial Economics, Elsevier, vol. 104(3), pages 519-534.
    5. Sanjiv Ranjan Das & Raman Uppal, 2004. "Systemic Risk and International Portfolio Choice," Journal of Finance, American Finance Association, vol. 59(6), pages 2809-2834, December.
    6. Sofiane Aboura, 2015. "Disentangling Crashes from Tail Events," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 20(3), pages 206-219, July.
    7. Dionisio, Andreia & Menezes, Rui & Mendes, Diana A., 2004. "Mutual information: a measure of dependency for nonlinear time series," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 344(1), pages 326-329.
    8. Nikola Tarashev & Kostas Tsatsaronis & Claudio Borio, 2016. "Risk Attribution Using the Shapley Value: Methodology and Policy Applications," Review of Finance, European Finance Association, vol. 20(3), pages 1189-1213.
    9. Darbellay, Georges A & Wuertz, Diethelm, 2000. "The entropy as a tool for analysing statistical dependences in financial time series," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 287(3), pages 429-439.
    10. Colangelo, Antonio & Scarsini, Marco & Shaked, Moshe, 2005. "Some notions of multivariate positive dependence," Insurance: Mathematics and Economics, Elsevier, vol. 37(1), pages 13-26, August.
    11. Heikki Lehkonen, 2015. "Stock Market Integration and the Global Financial Crisis," Review of Finance, European Finance Association, vol. 19(5), pages 2039-2094.
    12. U. Cherubini & E. Luciano, 2002. "Bivariate option pricing with copulas," Applied Mathematical Finance, Taylor & Francis Journals, vol. 9(2), pages 69-85.
    13. Li, Haijun, 2009. "Orthant tail dependence of multivariate extreme value distributions," Journal of Multivariate Analysis, Elsevier, vol. 100(1), pages 243-256, January.
    14. Einmahl, John H. J. & Li, Jun & Liu, Regina Y., 2009. "Thresholding Events of Extreme in Simultaneous Monitoring of Multiple Risks," Journal of the American Statistical Association, American Statistical Association, vol. 104(487), pages 982-992.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Polanski, Arnold & Stoja, Evarist, 2015. "Extreme risk interdependence," Bank of England working papers 563, Bank of England.
    2. Polanski, Arnold & Stoja, Evarist, 2016. "Extreme risk interdependence," ESRB Working Paper Series 12, European Systemic Risk Board.
    3. Polanski, Arnold & Stoja, Evarist, 2017. "Forecasting multidimensional tail risk at short and long horizons," International Journal of Forecasting, Elsevier, vol. 33(4), pages 958-969.
    4. Polanski, Arnold & Stoja, Evarist, 2017. "Forecasting multidimensional tail risk at short and long horizons," Bank of England working papers 660, Bank of England.
    5. Arouri, Mohamed & M’saddek, Oussama & Pukthuanthong, Kuntara, 2019. "Jump risk premia across major international equity markets," Journal of Empirical Finance, Elsevier, vol. 52(C), pages 1-21.
    6. Arouri, Mohamed & M’saddek, Oussama & Nguyen, Duc Khuong & Pukthuanthong, Kuntara, 2019. "Cojumps and asset allocation in international equity markets," Journal of Economic Dynamics and Control, Elsevier, vol. 98(C), pages 1-22.
    7. Patrick Bielstein, 2018. "International asset allocation using the market implied cost of capital," Financial Markets and Portfolio Management, Springer;Swiss Society for Financial Market Research, vol. 32(1), pages 17-51, February.
    8. Hartmann, Daniel & Kempa, Bernd & Pierdzioch, Christian, 2008. "Economic and financial crises and the predictability of U.S. stock returns," Journal of Empirical Finance, Elsevier, vol. 15(3), pages 468-480, June.
    9. Rodriguez, Juan Carlos, 2007. "Measuring financial contagion: A Copula approach," Journal of Empirical Finance, Elsevier, vol. 14(3), pages 401-423, June.
    10. Carlos Castro & Nini Johana Marin, 2014. "Stock return comovements and integration within the Latin American integrated market," Documentos de Trabajo 011082, Universidad del Rosario.
    11. Lorán Chollete & Andréas Heinen & Alfonso Valdesogo, 2009. "Modeling International Financial Returns with a Multivariate Regime-switching Copula," Journal of Financial Econometrics, Society for Financial Econometrics, vol. 7(4), pages 437-480, Fall.
    12. Massimo Guidolin & Giovanna Nicodano, 2009. "Small caps in international equity portfolios: the effects of variance risk," Annals of Finance, Springer, vol. 5(1), pages 15-48, January.
    13. Erik Kole & Dick Dijk, 2017. "How to Identify and Forecast Bull and Bear Markets?," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 32(1), pages 120-139, January.
    14. van den Bremer, Ton & van der Ploeg, Frederick & Wills, Samuel, 2016. "The Elephant In The Ground: Managing Oil And Sovereign Wealth," European Economic Review, Elsevier, vol. 82(C), pages 113-131.
    15. Kang, Sang Hoon & Uddin, Gazi Salah & Troster, Victor & Yoon, Seong-Min, 2019. "Directional spillover effects between ASEAN and world stock markets," Journal of Multinational Financial Management, Elsevier, vol. 52.
    16. Abdol S. Soofi & Zhe Li & Xiaofeng Hui, 2012. "Nonlinear interdependence of the Chinese stock markets," Quantitative Finance, Taylor & Francis Journals, vol. 12(3), pages 397-410, November.
    17. Zhou, Chunyang & Wu, Chongfeng & Wang, Yudong, 2019. "Dynamic portfolio allocation with time-varying jump risk," Journal of Empirical Finance, Elsevier, vol. 50(C), pages 113-124.
    18. Branger, Nicole & Kraft, Holger & Meinerding, Christoph, 2009. "What is the impact of stock market contagion on an investor's portfolio choice?," Insurance: Mathematics and Economics, Elsevier, vol. 45(1), pages 94-112, August.
    19. Massimo Guidolin & Giovanna Nicodano, 2010. "Ex Post Portfolio Performance with Predictable Skewness and Kurtosis," Carlo Alberto Notebooks 191, Collegio Carlo Alberto.
    20. Yang, Hsin-Feng & Liu, Chih-Liang & Yeutien Chou, Ray, 2020. "Bank diversification and systemic risk," The Quarterly Review of Economics and Finance, Elsevier, vol. 77(C), pages 311-326.

    More about this item

    Keywords

    Co-exceedance; systemic distress; risk contribution; extreme risk interdependence;
    All these keywords.

    JEL classification:

    • 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
    • G01 - Financial Economics - - General - - - Financial Crises

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:boe:boeewp:0815. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Digital Media Team). General contact details of provider: http://edirc.repec.org/data/boegvuk.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.