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Testing for differences in the tails of stock-market returns

  • ROCKINGER, Michael
  • JONDEAU, Eric

    (ERUDITE, Paris XII Val de Marne)

In this paper, we use a database consisting of daily stock-returns for 20 countries to test for similarities between the left and right tail of returns as well as for cross-sectional differences. To mitigate the issue of dependency between stock returns, we estimate the distribution of extremes over subsamples of two months. We document a good fit of the model and show that the left and right tails of returns behave very similarly. Across countries, we find that extremes are located at different levels and that their dispersion varies. On the other hand, the tail index, characterizing large extreme realizations is found to be constant worldwide. Our results are not due to a lack of power. We also discuss the results from an economic point of view.

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Paper provided by HEC Paris in its series Les Cahiers de Recherche with number 739.

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Length: 28 pages
Date of creation: 01 Oct 2001
Date of revision:
Handle: RePEc:ebg:heccah:0739
Contact details of provider: Postal: HEC Paris, 78351 Jouy-en-Josas cedex, France
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  1. Phillip Kearns & Adrian Pagan, 1997. "Estimating The Density Tail Index For Financial Time Series," The Review of Economics and Statistics, MIT Press, vol. 79(2), pages 171-175, May.
  2. Hols, Martien C A B & de Vries, Casper G, 1991. "The Limiting Distribution of Extremal Exchange Rate Returns," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 6(3), pages 287-302, July-Sept.
  3. Hsing, Tailen, 1991. "Estimating the parameters of rare events," Stochastic Processes and their Applications, Elsevier, vol. 37(1), pages 117-139, February.
  4. Hentschel, Ludger & Campbell, John, 1992. "No News is Good News: An Asymmetric Model of Changing Volatility in Stock Returns," Scholarly Articles 3220232, Harvard University Department of Economics.
  5. Hartmann, P. & Straetmans, S. & De Vries, C.G., 2001. "Asset Market Linkages in Crisis Periods," Papers 71, Quebec a Montreal - Recherche en gestion.
  6. Dennis Jansen & Casper de Vries, 1988. "On the frequency of large stock returns: putting booms and busts into perspective," Working Papers 1989-006, Federal Reserve Bank of St. Louis.
  7. Claessens, Stijn & Dasgupta, Susmita & Glen, Jack, 1995. "Return Behavior in Emerging Stock Markets," World Bank Economic Review, World Bank Group, vol. 9(1), pages 131-51, January.
  8. repec:ner:tilbur:urn:nbn:nl:ui:12-3108722 is not listed on IDEAS
  9. repec:dgr:uvatin:19970016 is not listed on IDEAS
  10. 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.
  11. repec:ner:tilbur:urn:nbn:nl:ui:12-3108733 is not listed on IDEAS
  12. Quintos, Carmela & Fan, Zhenhong & Phillips, Peter C B, 2001. "Structural Change Tests in Tail Behaviour and the Asian Crisis," Review of Economic Studies, Wiley Blackwell, vol. 68(3), pages 633-63, July.
  13. François Longin, 2001. "Extreme Correlation of International Equity Markets," Journal of Finance, American Finance Association, vol. 56(2), pages 649-676, 04.
  14. McNeil, Alexander J. & Frey, Rudiger, 2000. "Estimation of tail-related risk measures for heteroscedastic financial time series: an extreme value approach," Journal of Empirical Finance, Elsevier, vol. 7(3-4), pages 271-300, November.
  15. Koedijk, Kees G & Kool, Clemens J M, 1992. "Tail Estimates of East European Exchange Rates," Journal of Business & Economic Statistics, American Statistical Association, vol. 10(1), pages 83-96, January.
  16. Rockinger, Michael & Urga, Giovanni, 2001. "A Time-Varying Parameter Model to Test for Predictability and Integration in the Stock Markets of Transition Economies," Journal of Business & Economic Statistics, American Statistical Association, vol. 19(1), pages 73-84, January.
  17. 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.
  18. Bekaert, Geert & Harvey, Campbell R., 1997. "Emerging equity market volatility," Journal of Financial Economics, Elsevier, vol. 43(1), pages 29-77, January.
  19. 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.
  20. repec:dgr:uvatin:20010071 is not listed on IDEAS
  21. Huisman, Ronald, et al, 2001. "Tail-Index Estimates in Small Samples," Journal of Business & Economic Statistics, American Statistical Association, vol. 19(2), pages 208-16, April.
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