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No 719:
New Extreme-Value Dependance Measures and Finance Applications

Ser-Huang POON, Michael ROCKINGER and Jonathan TAWN

Abstract: In the finance literature, cross-sectional dependence in extreme returns of risky assets is often modeled 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 favor 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; (follow links to similar papers)

JEL-Codes: C13; C22; G11; G15; (follow links to similar papers)

29 pages, February 6, 2001

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