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Structural Change in Tail Behavior and the Asian Financial Crisis

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Abstract

This paper explores tests of the hypothesis that the tail thickness of a distribution is constant over time. Using Hill's conditional maximum likelihood estimator for the tail index of a distribution, tests of tail shape constancy are constructed that allow for an unknown breakpoint. The recursive test is shown to be inconsistent in one direction, and only a one-sided test is recommended. Specifically, the test can be used when the alternative hypothesis is that the tail index decreases over time. A rolling and sequential version of the test is consistent in both directions. The methods are illustrated on recent stock price data for Thailand, Malaysia and Indonesia. The period covers the recent Asian financial crisis and enables us to assess whether breakpoints in domestic asset return distributions are related to known changes in institutional arrangements in the foreign currency markets of these countries.

Suggested Citation

  • Carmela E. Quintos & Zhenhong Fan & Peter C.B. Phillips, 2000. "Structural Change in Tail Behavior and the Asian Financial Crisis," Cowles Foundation Discussion Papers 1283, Cowles Foundation for Research in Economics, Yale University.
  • Handle: RePEc:cwl:cwldpp:1283
    Note: CFP 1030.
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    File URL: https://cowles.yale.edu/sites/default/files/files/pub/d12/d1283.pdf
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    5. Peter C.B. Phillips & Mico Loretan, 1990. "Testing Covariance Stationarity Under Moment Condition Failure with an Application to Common Stock Returns," Cowles Foundation Discussion Papers 947, Cowles Foundation for Research in Economics, Yale University.
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    7. Banerjee, Anindya & Lumsdaine, Robin L & Stock, James H, 1992. "Recursive and Sequential Tests of the Unit-Root and Trend-Break Hypotheses: Theory and International Evidence," Journal of Business & Economic Statistics, American Statistical Association, vol. 10(3), pages 271-287, July.
    8. Casper De Vries & Jon Danielsson & Casper G, de Vries, 1996. "Tail Index and Quantile Estimation with Very High Frequency Data," CESifo Working Paper Series 116, CESifo.
    9. Benoit Mandelbrot, 2015. "The Variation of Certain Speculative Prices," World Scientific Book Chapters, in: Anastasios G Malliaris & William T Ziemba (ed.), THE WORLD SCIENTIFIC HANDBOOK OF FUTURES MARKETS, chapter 3, pages 39-78, World Scientific Publishing Co. Pte. Ltd..
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    Cited by:

    1. Elena Andreou, 2004. "The Impact of Sampling Frequency and Volatility Estimators on Change-Point Tests," Journal of Financial Econometrics, Oxford University Press, vol. 2(2), pages 290-318.

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    More about this item

    Keywords

    Extreme value theory; Hill estimator; Structural change; Tail index estimation;
    All these keywords.

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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