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Modelling extreme-value dependence in international stock markets.

Poon, Ser-Huang; and Rockinger, Michael; and Tawn, Jonathan (2003) Modelling extreme-value dependence in international stock markets. Statistica Sinica, 13. pp. 929-953. ISSN 1017-0405

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Abstract

In the finance literature, cross-sectional dependence in extreme returns of risky assets is often modelled implicitly assuming an asymptotically dependent structure. If the true dependence structure is asymptotically independent then current modelling approaches will lead to an over-estimation of the risk of simultaneous extreme events. We use two simple nonparametric measures to identify and quantify the tail dependence among stock returns in five international stock markets. We show that there is strong evidence in favour of asymptotically independent models for the tail structure of stock market returns, and that most of the extremal dependence is due to heteroskedasticity in stock returns processes. Using a range of volatility filters, we find that tail index and tail dependence can be partially captured by models for heteroskedasticity. We find there is no clear reason to prefer one volatility filter over another.

Item Type: Article
Journal or Publication Title: Statistica Sinica
Uncontrolled Keywords: Asymptotic independence ; extreme value theory ; Hill's estimator ; risk management ; tail index.
Subjects: Q Science > QA Mathematics
Departments: Faculty of Science and Technology > Mathematics and Statistics
ID Code: 10007
Deposited By: Mrs Yaling Zhang
Deposited On: 25 Jun 2008 16:42
Refereed?: Yes
Published?: Published
Last Modified: 09 Oct 2013 15:39
Identification Number:
URI: http://eprints.lancs.ac.uk/id/eprint/10007

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