Paths and indices of maximal tail dependence

Edward Furman, Jianxi Su and Ri\v{c}ardas Zitikis

Papers from arXiv.org

Abstract: We demonstrate both analytically and numerically that the existing methods for measuring tail dependence in copulas may sometimes underestimate the extent of extreme co-movements of dependent risks and, therefore, may not always comply with the new paradigm of prudent risk management. This phenomenon holds in the context of both symmetric and asymmetric copulas with and without singularities. As a remedy, we introduce a notion of paths of maximal (tail) dependence and utilize it to propose several new indices of tail dependence. The suggested new indices are conservative, conform with the basic concepts of modern quantitative risk management, and are able to distinguish between distinct risky positions in situations when the existing indices fail to do so.

Date: 2014-05, Revised 2016-07
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Persistent link: https://EconPapers.repec.org/RePEc:arx:papers:1405.1326

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