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The Tail Behavior of Stock Returns: Emerging versus Mature Markets

  • ROCKINGER, Michael
  • JONDEAU, Eric

    (Banque de France, Centre de recherche)

For Central Banks, institutional, and individual investors it is crucial to understand the frequency and importance of drops or sudden rises in financial markets. Extreme value theory (evt) is an interesting tool providing answers to questions such as: -with what frequency do we find variations of returns beyond a given threshold ? -over a given period, what type of extreme variation can be expected? - with what type of unconditional distribution of returns are the tails of returns compatible? -in a cross country setting of emerging and mature financial markets do extreme variations behave in a similar manner? - can we learn about the evolution of returns of presently developing economies from the early returns of presently mature markets? - do countries behave similarly in terms of up or down crashes for a given level of development? In the following paper we start with a review of theoretical elements of evt. In the empirical section of this study we consider five mature markets, nine Asian, six Eastern European, and seven Latin American emerging markets. The tail-behavior of returns is found to be compatible with the existence of up to the third moment but not beyond. The estimation of the tail distribution as a Generalized Pareto Distribution shows that great care has to be taken for emerging markets where little data is available and returns' distribution is subjet to violate the iid assumption. Using a subsample of countries we demonstrate the limitations of evt. We also show that little can be learned from 19th century US data about presently emerging markets' tail behavior.

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Paper provided by HEC Paris in its series Les Cahiers de Recherche with number 668.

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Length: 57 pages
Date of creation: 01 Apr 1999
Date of revision:
Handle: RePEc:ebg:heccah:0668
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  1. Benoit Mandelbrot, 1963. "The Variation of Certain Speculative Prices," The Journal of Business, University of Chicago Press, vol. 36, pages 394.
  2. Jansen, Dennis W & de Vries, Casper G, 1991. "On the Frequency of Large Stock Returns: Putting Booms and Busts into Perspective," The Review of Economics and Statistics, MIT Press, vol. 73(1), pages 18-24, February.
  3. Loretan, Mico & Phillips, Peter C. B., 1994. "Testing the covariance stationarity of heavy-tailed time series: An overview of the theory with applications to several financial datasets," Journal of Empirical Finance, Elsevier, vol. 1(2), pages 211-248, January.
  4. Baillie, Richard T. & Bollerslev, Tim & Mikkelsen, Hans Ole, 1996. "Fractionally integrated generalized autoregressive conditional heteroskedasticity," Journal of Econometrics, Elsevier, vol. 74(1), pages 3-30, September.
  5. de Haan, Laurens & Resnick, Sidney I. & Rootzén, Holger & de Vries, Casper G., 1989. "Extremal behaviour of solutions to a stochastic difference equation with applications to arch processes," Stochastic Processes and their Applications, Elsevier, vol. 32(2), pages 213-224, August.
  6. Bekaert, Geert & Harvey, Campbell R., 1997. "Emerging equity market volatility," Journal of Financial Economics, Elsevier, vol. 43(1), pages 29-77, January.
  7. Hall, Peter, 1990. "Using the bootstrap to estimate mean squared error and select smoothing parameter in nonparametric problems," Journal of Multivariate Analysis, Elsevier, vol. 32(2), pages 177-203, February.
  8. Eugene F. Fama, 1963. "Mandelbrot and the Stable Paretian Hypothesis," The Journal of Business, University of Chicago Press, vol. 36, pages 420.
  9. Kon, Stanley J, 1984. " Models of Stock Returns-A Comparison," Journal of Finance, American Finance Association, vol. 39(1), pages 147-65, March.
  10. repec:ner:tilbur:urn:nbn:nl:ui:12-3108722 is not listed on IDEAS
  11. Blattberg, Robert C & Gonedes, Nicholas J, 1974. "A Comparison of the Stable and Student Distributions as Statistical Models for Stock Prices," The Journal of Business, University of Chicago Press, vol. 47(2), pages 244-80, April.
  12. Longin, Francois M, 1996. "The Asymptotic Distribution of Extreme Stock Market Returns," The Journal of Business, University of Chicago Press, vol. 69(3), pages 383-408, July.
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