Beyond dimension two: A test for higher-order tail risk
In practice, multivariate dependencies between extreme risks are often only assessed in a pairwise way. We propose a test for detecting situations when such pairwise measures are inadequate and give incomplete results. This occurs when a significant portion of the multivariate dependence structure in the tails is of higher dimension than two. Our test statistic is based on a decomposition of the stable tail dependence function describing multivariate tail dependence. The asymptotic properties of the test are provided and a bootstrap based finite sample version of the test is proposed. A simulation study documents good size and power properties of the test including settings with time-series components and factor models. In an application to stock indices for non-crisis times, pairwise tail models seem appropriate for global markets while the test finds them not admissible for the tightly interconnected European market. From 2007/08 on, however, higher order dependencies generally increase and require a multivariate tail model in all cases.
|Date of creation:||2016|
|Contact details of provider:|| Web page: http://www.wiwi.kit.edu/|
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- P. Hartmann & S. Straetmans & C. G. de Vries, 2004.
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- Einmahl, J.H.J. & Krajina, A. & Segers, J.J.J., 2008. "A method of moments estimator of tail dependence," Other publications TiSEM 448fd556-b3e0-4fb0-bcb7-8, Tilburg University, School of Economics and Management.
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- S. T. M. Straetmans & W. F. C. Verschoor & C. C. P. Wolff, 2008. "Extreme US stock market fluctuations in the wake of 9|11," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 23(1), pages 17-42. Full references (including those not matched with items on IDEAS)
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