New Extreme-Value Dependence Measures and Finance Applications
University of Manchester - Business School
University of Lausanne - School of Economics and Business Administration (HEC-Lausanne); Centre for Economic Policy Research (CEPR); Swiss Finance Institute
Lancaster University - Department of Mathematics and Statistics
CEPR Discussion Paper No. 2762
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.
Number of Pages in PDF File: 33
Keywords: Asymptotic independence, extreme value theory, Hill's estimator, tail index
JEL Classification: C13, C22, G11, G15working papers series
Date posted: April 18, 2001
© 2013 Social Science Electronic Publishing, Inc. All Rights Reserved.
This page was processed by apollo7 in 0.828 seconds