New Extreme-Value Dependence Measures and Finance Applications

33 Pages Posted: 18 Apr 2001

See all articles by Ser-Huang Poon

Ser-Huang Poon

Alliance Manchester Business School, University of Manchester; Alan Turing Institute

Michael Rockinger

University of Lausanne - School of Economics and Business Administration (HEC-Lausanne); Centre for Economic Policy Research (CEPR); Swiss Finance Institute

Jonathan Tawn

Lancaster University - Mathematics and Statistics

Date Written: April 2001

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 existing finance models will lead to over-estimation of the risk of simultaneous extreme events. We provide simple techniques for deciding between these dependence classes and for quantifying the degree of dependence in each class. Examples based on daily stock market returns show that there is strong evidence in favour of asymptotically independent models for dependence in extremal stock market returns, and that most of the extremal dependence is due to heteroskedasticity in stock returns processes.

Keywords: Asymptotic independence, extreme value theory, Hill's estimator, tail index

JEL Classification: C13, C22, G11, G15

Suggested Citation

Poon, Ser-Huang and Rockinger, Georg Michael and Tawn, Jonathan, New Extreme-Value Dependence Measures and Finance Applications (April 2001). Available at SSRN: https://ssrn.com/abstract=267283

Ser-Huang Poon (Contact Author)

Alliance Manchester Business School, University of Manchester ( email )

Alliance Manchester Business School
Booth Street West
Manchester, Manchester M15 6PB
United Kingdom
+44 161 275 4031 (Phone)
+44 161 275 4023 (Fax)

HOME PAGE: http://www.manchester.ac.uk/research/Ser-huang.poon/

Alan Turing Institute ( email )

British Library, 96 Euston Road
96 Euston Road
London, NW12DB
United Kingdom

Georg Michael Rockinger

University of Lausanne - School of Economics and Business Administration (HEC-Lausanne) ( email )

Unil Dorigny, Batiment Internef
Lausanne, 1015
Switzerland
+41 21 728 3348 (Phone)
+41+21 692 3435 (Fax)

HOME PAGE: http://www.hec.unil.ch/mrockinger

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Swiss Finance Institute

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

Jonathan Tawn

Lancaster University - Mathematics and Statistics ( email )

Department of Mathematics and Statistics
Lancaster University
Lancaster, LA1 4YF
United Kingdom
+44 1524 59 3965 (Phone)
+44 1524 59 2681 (Fax)

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