Tail dependence and heavy tailedness in extreme risks

Liuyan Ji, Ken Seng Tan and Fan Yang

Insurance: Mathematics and Economics, 2021, vol. 99, issue C, 282-293

Abstract: In the modeling of multivariate extreme risks, the tail dependence and the heavy tailedness are the two key factors. Heavy tailedness are usually defined through the regular variation. Tail dependence can be modeled by copulas with the so-called tail order property. In this paper, we propose a new risk measure called the Joint Expected Shortfall (JES) as an alternative of quantifying extreme risks. The JES, which can be viewed as a consolidation of both Expected Shortfall (ES) and Marginal Expected Shortfall (MES) risk measures, has the desirable property of measuring risk by jointly capturing both tail dependence and heavy tailedness. The asymptotic analysis of JES is conducted to provide a simple and transparent way of studying the interplay between tail dependence and heavy tailedness. Various examples are presented to illuminate our results. In particular, risk measures such as ES and MES that ignore the joint effect of dependence and heavy tailedness may severely underestimate the underlying risk.

Keywords: Tail dependence; Copula; Heavy tail; Joint Expected Shortfall; Extreme values (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:insuma:v:99:y:2021:i:c:p:282-293

DOI: 10.1016/j.insmatheco.2021.03.016

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