A simple graphical method to explore tail-dependence in stock-return pairs

Klaus Abberger

Applied Financial Economics, 2005, vol. 15, issue 1, pages 43-51

Abstract: For a bivariate data set the dependence structure cannot only be measured globally, for example with the Bravais-Pearson correlation coefficient, but the dependence structure can also be analysed locally. In this article the exploration of dependencies in the tails of the bivariate distribution is discussed. For this a graphical method which is called a chi-plot and which was introduced by Fisher and Switzer is used. Examples with simulated data sets illustrate that the chi-plot is suitable for the exploration of dependencies. This graphical method is then used to examine stock-return pairs. The kind of tail-dependence between returns has consequences, for example, for the calculation of the value at risk and should be modelled carefully. The application of the chi-plot to various daily stock-return pairs shows that different dependence structures can be found. This graph can therefore be an interesting aid for the modelling of returns.

Date: 2005
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