VAR for VaR: Measuring Tail Dependence Using Multivariate Regression Quantiles

50 Pages Posted: 23 Jun 2015

See all articles by Halbert L. White, Jr.

Halbert L. White, Jr.

University of California, San Diego (UCSD) - Department of Economics

Tae-Hwan Kim

University of Nottingham - School of Economics; Yonsei University - Seoul Campus - College of Business and Economics

Simone Manganelli

European Central Bank (ECB)

Date Written: June 23, 2015

Abstract

This paper proposes methods for estimation and inference in multivariate, multi-quantile models. The theory can simultaneously accommodate models with multiple random variables, multiple confidence levels, and multiple lags of the associated quantiles. The proposed framework can be conveniently thought of as a vector autoregressive (VAR) extension to quantile models. We estimate a simple version of the model using market equity returns data to analyse spillovers in the values at risk (VaR) between a market index and financial institutions. We construct impulse-response functions for the quantiles of a sample of 230 financial institutions around the world and study how financial institution-specific and system-wide shocks are absorbed by the system. We show how the long-run risk of the largest and most leveraged financial institutions is very sensitive to market wide shocks in situations of financial distress, suggesting that our methodology can prove a valuable addition to the traditional toolkit of policy makers and supervisors.

Keywords: CAViaR; codependence; quantile impulse-responses; spillover

JEL Classification: C13, C14, C32

Suggested Citation

White, Halbert L. and Kim, Tae-Hwan and Manganelli, Simone, VAR for VaR: Measuring Tail Dependence Using Multivariate Regression Quantiles (June 23, 2015). ECB Working Paper No. 1814, Available at SSRN: https://ssrn.com/abstract=2621958 or http://dx.doi.org/10.2139/ssrn.2621958

Halbert L. White

University of California, San Diego (UCSD) - Department of Economics ( email )

9500 Gilman Drive
La Jolla, CA 92093-0508
United States
858-534-3502 (Phone)
858-534-7040 (Fax)

HOME PAGE: http://www.econ.ucsd.edu/~mbacci/white/

Tae-Hwan Kim

University of Nottingham - School of Economics ( email )

University Park
Nottingham, NG7 2RD
United Kingdom
+44 115 951 5620 (Phone)
+44 115 951 4159 (Fax)

Yonsei University - Seoul Campus - College of Business and Economics ( email )

Yonsei University
Seoul
Korea

Simone Manganelli (Contact Author)

European Central Bank (ECB) ( email )

Kaiserstrasse 29
Frankfurt am Main, 60311
Germany

HOME PAGE: http://www.simonemanganelli.org

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