Tail Dependence Measure for Examining Financial Extreme Co-Movements

32 Pages Posted: 9 Jan 2014 Last revised: 16 Aug 2016

See all articles by Alexandru Vali Asimit

Alexandru Vali Asimit

Cass Business School, City, University of London

Russell J. Gerrard

City University London - Sir John Cass Business School

Yanxi Hou

Georgia Institute of Technology - Mathematics

Liang Peng

Georgia State University - Risk Management & Insurance Department

Date Written: April 8, 2015

Abstract

Modeling and forecasting extreme co-movements in financial market is important for conducting stress test in risk management. Asymptotic independence and asymptotic dependence behave drastically different in modeling such co-movements. For example, the impact of extreme events is usually overestimated whenever asymptotic dependence is wrongly assumed. On the other hand, the impact is seriously underestimated whenever the data is misspecified as asymptotic independent. Therefore, distinguishing between asymptotic independence/dependence scenarios is very informative for any decision-making and especially in risk management. We investigate the properties of the limiting conditional Kendall's tau which can be used to detect the presence of asymptotic independence/dependence. We also propose nonparametric estimation for this new measure and derive its asymptotic limit. A simulation study shows good performances of the new measure and its combination with the coefficient of tail dependence proposed by Ledford and Tawn (1996, 1997). Finally, applications to financial and insurance data are provided.

Keywords: Asymptotic dependence and independence; Copula; Extreme co-movement; Kendall's tau; Measure of association.

JEL Classification: C13, C14, C44

Suggested Citation

Asimit, Alexandru Vali and Gerrard, Russell J. and Hou, Yanxi and Peng, Liang, Tail Dependence Measure for Examining Financial Extreme Co-Movements (April 8, 2015). Journal of Econometrics, 2016, 194(2), 330-348. Available at SSRN: https://ssrn.com/abstract=2376288 or http://dx.doi.org/10.2139/ssrn.2376288

Alexandru Vali Asimit (Contact Author)

Cass Business School, City, University of London ( email )

106 Bunhill Row
London, EC1Y 8TZ
United Kingdom

Russell J. Gerrard

City University London - Sir John Cass Business School ( email )

106 Bunhill Row
London, EC1Y 8TZ
United Kingdom

Yanxi Hou

Georgia Institute of Technology - Mathematics ( email )

United States

Liang Peng

Georgia State University - Risk Management & Insurance Department

P.O. Box 4036
Atlanta, GA 30302-4036
United States

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