Extreme risk interdependence

Arnold Polanski (a.polanski@uea.ac.uk) and Evarist Stoja (e.stoja@bristol.ac.uk)
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Arnold Polanski: University of East Anglia
Evarist Stoja: University of Bristol

No 563, Bank of England working papers from Bank of England

Abstract: Tail interdependence is defined as the situation where extreme outcomes for some variables are informative about such outcomes for other variables. We extend the concept of multi-information to quantify tail interdependence at different levels of extremity, decompose it into systemic and residual part and measure the contribution of a constituent to the interdependence of a system. Further, we devise statistical procedures to test: a) tail independence; b) whether an empirical interdependence structure is generated by a theoretical model; and c) symmetry of the interdependence structure in the tails. The application of this approach to multidimensional financial data confirms some known and uncovers new stylized facts on extreme returns.

Keywords: Co-exceedance; Kullback-Leibler divergence; multi-information; relative entropy; risk contribution; risk interdependence. (search for similar items in EconPapers)
JEL-codes: C12 C14 C52 (search for similar items in EconPapers)
Pages: 39 pages
Date: 2015-11-06
New Economics Papers: this item is included in nep-ecm and nep-rmg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:boe:boeewp:0563

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