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The Extreme-Value Dependence Between the Chinese and Other International Stock Markets

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Abstract

Extreme value theory (EVT) measures the behavior of extreme observations on a random variable. EVT in risk management, an approach to modeling and measuring risks under rare events, has taken on a prominent role in recent years. This paper contributes to the literature in two respects by analyzing an interesting international financial data set. First, we apply conditional EVT to examine the Value at Risk (VAR) and the Expected Shortfall (ES) for the Chinese and several representative international stock market indices: Hang Seng (Hong Kong), TSEC (Taiwan), Nikkei 225 (Japan), Kospi (Korea), BSE (India), STI (Singapore), S&P 500 (US), SPTSE (Canada), IPC (Mexico), CAC 40 (France), DAX 30 (Germany), FTSE100 (UK) index. We find that China has the highest VaR and ES for negative daily stock returns. Second, we examine the extreme dependence between these stock markets, and we find that the Chinese market is asymptotically independent of the other stock markets considered.

Suggested Citation

  • David E. Giles, 2010. "The Extreme-Value Dependence Between the Chinese and Other International Stock Markets," Econometrics Working Papers 1003, Department of Economics, University of Victoria.
  • Handle: RePEc:vic:vicewp:1003
    Note: ISSN 1485-6441
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    References listed on IDEAS

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    1. Engle, Robert F. & Kroner, Kenneth F., 1995. "Multivariate Simultaneous Generalized ARCH," Econometric Theory, Cambridge University Press, vol. 11(01), pages 122-150, February.
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    3. 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.
    4. Glosten, Lawrence R & Jagannathan, Ravi & Runkle, David E, 1993. " On the Relation between the Expected Value and the Volatility of the Nominal Excess Return on Stocks," Journal of Finance, American Finance Association, vol. 48(5), pages 1779-1801, December.
    5. Kristin J. Forbes & Roberto Rigobon, 2002. "No Contagion, Only Interdependence: Measuring Stock Market Comovements," Journal of Finance, American Finance Association, vol. 57(5), pages 2223-2261, October.
    6. Acerbi, Carlo, 2002. "Spectral measures of risk: A coherent representation of subjective risk aversion," Journal of Banking & Finance, Elsevier, vol. 26(7), pages 1505-1518, July.
    7. Bekiros, Stelios D. & Georgoutsos, Dimitris A., 2008. "The extreme-value dependence of Asia-Pacific equity markets," Journal of Multinational Financial Management, Elsevier, vol. 18(3), pages 197-208, July.
    8. Kenneth P. Burnham & David R. Anderson, 2004. "Multimodel Inference," Sociological Methods & Research, , vol. 33(2), pages 261-304, November.
    9. 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.
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    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Modelling Extremes
      by Dave Giles in Econometrics Beat: Dave Giles' Blog on 2012-04-16 23:29:00

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    Cited by:

    1. Ye, Wuyi & Luo, Kebing & Liu, Xiaoquan, 2017. "Time-varying quantile association regression model with applications to financial contagion and VaR," European Journal of Operational Research, Elsevier, vol. 256(3), pages 1015-1028.
    2. Chen, Qian & Lv, Xin, 2015. "The extreme-value dependence between the crude oil price and Chinese stock markets," International Review of Economics & Finance, Elsevier, vol. 39(C), pages 121-132.

    More about this item

    Keywords

    Extreme value analysis; peaks-over-threshold; value at risk; expected shortfall; asymptotic dependence; Chinese equity market;

    JEL classification:

    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
    • C16 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Econometric and Statistical Methods; Specific Distributions
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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