Les Cahiers de Recherche - HEC Paris
Michael ROCKINGER and Eric JONDEAU
The Tail Behavior of Stock Returns: Emerging versus Mature Markets
Abstract: For Central Banks, institutional, and individual investors
it is crucial to understand the frequency and importance of drops or sudden
rises in financial markets. Extreme value theory (evt) is an interesting
tool providing answers to questions such as:
-with what frequency do we
find variations of returns beyond a given threshold ?
-over a given
period, what type of extreme variation can be expected?
- with what
type of unconditional distribution of returns are the tails of returns
-in a cross country setting of emerging and mature
financial markets do extreme variations behave in a similar manner?
can we learn about the evolution of returns of presently developing
economies from the early returns of presently mature markets?
countries behave similarly in terms of up or down crashes for a given level
In the following paper we start with a review of
theoretical elements of evt. In the empirical section of this study we
consider five mature markets, nine Asian, six Eastern European, and seven
Latin American emerging markets. The tail-behavior of returns is found to
be compatible with the existence of up to the third moment but not beyond.
The estimation of the tail distribution as a Generalized Pareto
Distribution shows that great care has to be taken for emerging markets
where little data is available and returns' distribution is subjet to
violate the iid assumption. Using a subsample of countries we demonstrate
the limitations of evt. We also show that little can be learned from 19th
century US data about presently emerging markets' tail behavior.
Keywords: extreme value theory; generalized Pareto distribution; stock market returns; (follow links to similar papers)
JEL-Codes: C13; C22; G15; O16; (follow links to similar papers)
57 pages, April 1, 1999
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