Clustering of Extremes in Financial Returns: A Study of Developed and Emerging Markets

Sara Ali Alokley and Mansour Saleh Albarrak
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Sara Ali Alokley: Department of Finance, School of Business, King Faisal University, Al-Hasa 31982, Saudi Arabia
Mansour Saleh Albarrak: Department of Finance, College of Admiratives and Financial Sciences, Saudi Electronic University, Riyadh 13316, Saudi Arabia

JRFM, 2020, vol. 13, issue 7, 1-11

Abstract: This paper investigates the clustering or dependency of extremes in financial returns by estimating the extremal index value, in which smaller values of the extremal index correspond to more clustering. We apply the interval estimator method to determine the extremal index for a range of threshold values in the developed and emerging markets from 2007–2017. The indices we used to represent developed markets are from France, Germany, Italy, Japan, USA, UK, Spain, and Sweden. For the emerging markets, we use indices from China, Brazil, India, Malaysia, Russia, Saudi Arabia, and Portugal. The results show that clustering occurs in the emerging and developed markets under several threshold values. This study will shed light on the dependency structure of financial returns data and the proprieties of the extremes returns. Moreover, understanding clustering of extremes in these markets can help investors reduce the exposure to extreme financial events, such as the financial crisis.

Keywords: clustering; extremes; returns; dependency; extermal index (search for similar items in EconPapers)
JEL-codes: C E F2 F3 G (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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