IDEAS home Printed from https://ideas.repec.org/p/hal/wpaper/hal-00597018.html
   My bibliography  Save this paper

New Extreme-Value Dependance Measures and Finance Applications

Author

Listed:
  • Ser-Huang Poon

    (Department of Accounting and Finance - University of Strathclyde)

  • Michael Rockinger

    (GREGH - Groupement de Recherche et d'Etudes en Gestion à HEC - HEC Paris - Ecole des Hautes Etudes Commerciales - CNRS - Centre National de la Recherche Scientifique)

  • J. Tawn

    (Department of mathematics and statistics)

Abstract

In the finance literature, cross-sectional dependence in extreme returns of risky assets is often modelled implicitly assuming an asymptotically dependent structure. If the true dependence structure is asymptotically independent then existing finance models will lead to over-estimation of the risk of simultaneous extreme events. We provide simple techniques for deciding between these dependence classes and for quantifying the degree of dependence in each class. Examples based on daily stock market returns show that there is strong evidence in favour of asymptotically independent models for dependence in extremal stock market returns, and that most of the extremal dependence is due to heteroskedasticity in stock returns processes.

Suggested Citation

  • Ser-Huang Poon & Michael Rockinger & J. Tawn, 2001. "New Extreme-Value Dependance Measures and Finance Applications," Working Papers hal-00597018, HAL.
  • Handle: RePEc:hal:wpaper:hal-00597018
    Note: View the original document on HAL open archive server: https://hal-hec.archives-ouvertes.fr/hal-00597018
    as

    Download full text from publisher

    To our knowledge, this item is not available for download. To find whether it is available, there are three options:
    1. Check below whether another version of this item is available online.
    2. Check on the provider's web page whether it is in fact available.
    3. Perform a search for a similarly titled item that would be available.

    Other versions of this item:

    References listed on IDEAS

    as
    1. Francis X. Diebold & Til Schuermann & John D. Stroughair, 1998. "Pitfalls and Opportunities in the Use of Extreme Value Theory in Risk Management," Center for Financial Institutions Working Papers 98-10, Wharton School Center for Financial Institutions, University of Pennsylvania.
    2. P. Hartmann & S. Straetmans & C. G. de Vries, 2004. "Asset Market Linkages in Crisis Periods," The Review of Economics and Statistics, MIT Press, vol. 86(1), pages 313-326, February.
    3. ROCKINGER, Michael & JONDEAU, Eric, 2000. "Entropy densities," Les Cahiers de Recherche 709, HEC Paris.
    4. Richardson, Matthew & Smith, Tom, 1993. "A Test for Multivariate Normality in Stock Returns," The Journal of Business, University of Chicago Press, vol. 66(2), pages 295-321, April.
    5. Rockinger, Michael & Jondeau, Eric, 2002. "Entropy densities with an application to autoregressive conditional skewness and kurtosis," Journal of Econometrics, Elsevier, vol. 106(1), pages 119-142, January.
    6. 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.
    7. Harvey, Campbell R. & Siddique, Akhtar, 1999. "Autoregressive Conditional Skewness," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 34(04), pages 465-487, December.
    8. Terry A. Marsh & Niklas Wagner, 2004. "Return-Volume Dependence and Extremes in International Equity Markets," Finance 0401007, EconWPA.
    9. Longin, Francois M., 2000. "From value at risk to stress testing: The extreme value approach," Journal of Banking & Finance, Elsevier, vol. 24(7), pages 1097-1130, July.
    10. P. Bortot & S. Coles & J. Tawn, 2000. "The multivariate Gaussian tail model: an application to oceanographic data," Journal of the Royal Statistical Society Series C, Royal Statistical Society, vol. 49(1), pages 31-049.
    11. Longin, François & Solnik, Bruno H, 2000. "Extreme Correlation of International Equity Markets," CEPR Discussion Papers 2538, C.E.P.R. Discussion Papers.
    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.
    13. Starica, Catalin, 1999. "Multivariate extremes for models with constant conditional correlations," Journal of Empirical Finance, Elsevier, vol. 6(5), pages 515-553, December.
    14. LONGIN, François & SOLNIK, Bruno, 2000. "Extreme correlation of international equity markets," Les Cahiers de Recherche 705, HEC Paris.
    15. Martens, Martin & Poon, Ser-Huang, 2001. "Returns synchronization and daily correlation dynamics between international stock markets," Journal of Banking & Finance, Elsevier, vol. 25(10), pages 1805-1827, October.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Viviana Fernández, 2003. "Extreme Value Theory: Value at Risk and Returns Dependence Around the World," Documentos de Trabajo 161, Centro de Economía Aplicada, Universidad de Chile.
    2. Geluk, J.L. & De Vries, C.G., 2006. "Weighted sums of subexponential random variables and asymptotic dependence between returns on reinsurance equities," Insurance: Mathematics and Economics, Elsevier, vol. 38(1), pages 39-56, February.
    3. Viviana Fernandez, 2004. "Extremal Dependence In Exchange Rate Markets," Econometric Society 2004 Latin American Meetings 13, Econometric Society.
    4. Hartmann, Philipp & Straetmans, Stefan & de Vries, Casper, 2004. "Fundamentals and joint currency crises," Working Paper Series 324, European Central Bank.
    5. Jonathan B. Hill, 2004. "Gaussian Tests of "Extremal White Noise" for Dependent, Heterogeneous, Heavy Tailed Time Series with an Application," Econometrics 0411014, EconWPA, revised 04 Nov 2005.
    6. Sebastian Schich, 2004. "European stock market dependencies when price changes are unusually large," Applied Financial Economics, Taylor & Francis Journals, vol. 14(3), pages 165-177.
    7. Fukuhara, Masahiro & Saruwatari, Yasufumi, 2003. "An Analysis of Contagion in Emerging Currency Markets Using Multivariate Extreme Value Theory," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 21(2), pages 113-131, August.
    8. David Laibson & Andrea Repetto & Jeremy Tobacman, 2003. "Wealth Accumulation, Credit Card Borrowing, and Consuption-Income Comovement," Documentos de Trabajo 166, Centro de Economía Aplicada, Universidad de Chile.
    9. De Vries, C.G., 2005. "The simple economics of bank fragility," Journal of Banking & Finance, Elsevier, vol. 29(4), pages 803-825, April.
    10. K. Minderhoud, 2006. "Systemic Risk in the Dutch Financial Sector," De Economist, Springer, vol. 154(2), pages 177-195, June.

    More about this item

    Keywords

    Asymptotic independence; Extreme value theory; Hill's estimator; Tail index;

    JEL classification:

    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

    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:hal:wpaper:hal-00597018. 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: (CCSD). General contact details of provider: https://hal.archives-ouvertes.fr/ .

    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.