TailCoR

40 Pages Posted: 31 May 2012 Last revised: 13 May 2015

See all articles by Lorenzo Ricci

Lorenzo Ricci

European Stability Mechanism

David Veredas

Vlerick Business School

Date Written: May 13, 2015

Abstract

Economic and financial crises are characterized by tail events. When they occur, tail correlations emerge, which have linear and non-linear origins. The former are due to the Pearson correlations, while the strength of the latter depends on the heavyness of the tails. We introduce TailCoR, a new metric for tail correlations that disentangles straightforwardly the linear and non-linear correlations. TailCoR is simple to compute, no optimizations are needed, and it performs well in small samples. When applied to a panel of eight major US banks, TailCoR increases during the financial crisis because of a surge in both the linear and non-linear correlations. The end of 2012 also shows an increase of TailCoR, which is solely driven by the non-linearity, reflecting the risks of tail events and their spillovers associated with the European sovereign debt crisis.

Keywords: Tail correlation, tail risk, quantile, ellipticity, crises

JEL Classification: C32, C51, G01

Suggested Citation

Ricci, Lorenzo and Veredas, David, TailCoR (May 13, 2015). Available at SSRN: https://ssrn.com/abstract=2071126 or http://dx.doi.org/10.2139/ssrn.2071126

Lorenzo Ricci

European Stability Mechanism ( email )

6a Circuit de la Foire Internationale
L-1347
Luxembourg

David Veredas (Contact Author)

Vlerick Business School ( email )

Library
REEP 1
Gent, BE-9000
Belgium

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