Identification of Asset Price Misalignments on Financial Markets With Extreme Value Theory

Narcisa Kadlcakova, Lubos Komarek (), Zlatuse Komarkova () and Michal Hlaváček

Working Papers from Czech National Bank, Research and Statistics Department

Abstract: This paper examines the potential for concurrence of crises in the foreign exchange, stock, and government bond markets as well as identifying asset price misalignments from equilibrium for three Central European countries and the euro area. Concurrence is understood as the joint occurrence of extreme asset changes in different countries and is assessed with a measure of the asymptotic tail dependence among the distributions studied. However, the main aim of the paper is to examine the potential for concurrence of misalignments from equilibrium among financial markets. To this end, representative assets are linked to their fundamentals using a cointegration approach. Next, the extreme values of the differences between the actual daily exchange rates and their monthly equilibrium values determine the episodes associated with large departures from equilibrium. Using tools from Extreme Value Theory, we analyze the transmission of both standard crisis and misalignment-from-equilibrium formation events in the foreign exchange, stock, and government bond markets examined. The results reveal significant potential for co-alignment of extreme events in these markets in Central Europe. The evidence for co-movements is found to be very weak for the exchange rates, but is stronger for the stock markets and bond markets in some periods.

Keywords: Cointegration; concurrence of extreme values; Extreme Value Theory; financial market (search for similar items in EconPapers)
JEL-codes: C38 C58 E44 G12 (search for similar items in EconPapers)
Date: 2013-12
New Economics Papers: this item is included in nep-mac
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Journal Article: Identification of Asset Price Misalignments on Financial Markets With Extreme Value Theory (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:cnb:wpaper:2013/14

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