Tail dependence measure for examining financial extreme co-movements

Alexandru V. Asimit, Russell Gerrard, Yanxi Hou and Liang Peng

Journal of Econometrics, 2016, vol. 194, issue 2, 330-348

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 (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (11)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:econom:v:194:y:2016:i:2:p:330-348

DOI: 10.1016/j.jeconom.2016.05.011

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