Assessing Maximal Dependence Within Extreme Co-Movements of Financial Instruments

36 Pages Posted: 14 Jul 2020

See all articles by Ning Sun

Ning Sun

University of Western Ontario

Chen Yang

Wuhan University

Ricardas Zitikis

Western University

Date Written: June 19, 2020

Abstract

Assessing dependence within extreme co-movements of financial instruments has been of much interest in risk management. Typically, indices of tail dependence are used to quantify the strength of such dependence, although many of the indices that we find in the literature underreport the strength due to equal treatment of the instruments in the tail of their loss distributions. When this becomes an issue, we advocate the use of a procedure designed to estimate the maximal strength of dependence that can possibly occur among the co-movements. We illustrate the performance of the procedure and its implementation using simulated and real data-sets. Detailed analyses of foreign currency exchange rates, stock market indices, and treasury notes are given.

Keywords: extreme co-movement, maximal tail dependence, financial instrument, statistical hypothesis

JEL Classification: C13, C15, C18, C58, C63, G17

Suggested Citation

Sun, Ning and Yang, Chen and Zitikis, Ricardas, Assessing Maximal Dependence Within Extreme Co-Movements of Financial Instruments (June 19, 2020). Available at SSRN: https://ssrn.com/abstract=3631426 or http://dx.doi.org/10.2139/ssrn.3631426

Ning Sun

University of Western Ontario ( email )

1151 Richmond Street
Suite 2
London, Ontario N6A 5B8
Canada

Chen Yang

Wuhan University ( email )

Wuhan
China

Ricardas Zitikis (Contact Author)

Western University ( email )

1151 Richmond Street
Suite 2
London, Ontario N6A 5B8
Canada

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