Detecting structural differences in tail dependence of financial time series
Carsten Bormann and
No 122, Working Paper Series in Economics from Karlsruhe Institute of Technology (KIT), Department of Economics and Business Engineering
An accurate assessment of tail inequalities and tail asymmetries of financial returns is key for risk management and portfolio allocation. We propose a new test procedure for detecting the full extent of such structural differences in the dependence of bivariate extreme returns. We decompose the testing problem into piecewise multiple comparisons of Cramér-von Mises distances of tail copulas. In this way, tail regions that cause differences in extreme dependence can be located and consequently be targeted by financial strategies. We derive the asymptotic properties of the test and provide a bootstrap approximation for finite samples. Moreover, we account for the multiplicity of the piecewise tail copula comparisons by adjusting individual p-values according to multiple testing techniques. Monte Carlo simulations demonstrate the test's superior finite-sample properties for common financial tail risk models, both in the i.i.d. and the sequentially dependent case. During the last 90 years in US stock markets, our test detects up to 20% more tail asymmetries than competing tests. This can be attributed to the presence of non-standard tail dependence structures. We also find evidence for diminishing tail asymmetries during every major financial crisis - except for the 2007-09 crisis - reflecting a risk-return trade-off for extreme returns.
Keywords: tail dependence; tail copulas; tail asymmetry; tail inequality; extreme values; multiple testing (search for similar items in EconPapers)
JEL-codes: C12 C53 C58 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ecm and nep-rmg
References: View references in EconPapers View complete reference list from CitEc
Citations: Track citations by RSS feed
Downloads: (external link)
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:zbw:kitwps:122
Access Statistics for this paper
More papers in Working Paper Series in Economics from Karlsruhe Institute of Technology (KIT), Department of Economics and Business Engineering Contact information at EDIRC.
Bibliographic data for series maintained by ZBW - Leibniz Information Centre for Economics ().