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Behavior of Extreme Dependence between Stock Markets when the Regime Shifts

Tajvidi, Nader LU ; Kiatsupaibul, Seksan; Tirapat, Sunti and Panyangam, Chonnart (2015) In Sri Lankan Journal of Applied Statistics 16(1). p.21-40
Abstract
We propose a methodology based on multivariate extreme value theory, to analyze the dependence between markets during the financial crisis. We argue that extreme dependence based on block maximum is a more appropriate measure to study dependence between stock markets, when a regime shifts, than other alternatives. With this methodology, we are able to detect the increase in the extreme dependences between US and other markets during the 2008 financial crisis where traditional approaches fail to do so. In addition, the estimated dependent function allows one to quantify maximum impact of the crisis on each individual market. We then propose the use of a conditional loss distribution as a constructive tool for a stress test analysis in risk... (More)
We propose a methodology based on multivariate extreme value theory, to analyze the dependence between markets during the financial crisis. We argue that extreme dependence based on block maximum is a more appropriate measure to study dependence between stock markets, when a regime shifts, than other alternatives. With this methodology, we are able to detect the increase in the extreme dependences between US and other markets during the 2008 financial crisis where traditional approaches fail to do so. In addition, the estimated dependent function allows one to quantify maximum impact of the crisis on each individual market. We then propose the use of a conditional loss distribution as a constructive tool for a stress test analysis in risk management study. Stress test levels with respect to 2008 financial data calculated from the conditional loss distribution are given. (Less)
Please use this url to cite or link to this publication:
author
organization
publishing date
type
Contribution to specialist publication or newspaper
publication status
published
subject
keywords
Extreme Value Distribution, Extreme Dependence, Risk Management, Stress Test
categories
Popular Science
in
Sri Lankan Journal of Applied Statistics
volume
16
issue
1
pages
21 - 40
publisher
Institute of Applied Statistics, Sri Lanka
ISSN
2424-6271
DOI
10.4038/sljastats.v16i1.7805
language
English
LU publication?
yes
id
4797e756-a4d4-473a-973d-c0e3c64d8dd2 (old id 7988390)
alternative location
http://sljastats.sljol.info/articles/abstract/10.4038/sljastats.v16i1.7805/
date added to LUP
2015-11-11 13:44:46
date last changed
2017-02-08 13:49:27
@misc{4797e756-a4d4-473a-973d-c0e3c64d8dd2,
  abstract     = {We propose a methodology based on multivariate extreme value theory, to analyze the dependence between markets during the financial crisis. We argue that extreme dependence based on block maximum is a more appropriate measure to study dependence between stock markets, when a regime shifts, than other alternatives. With this methodology, we are able to detect the increase in the extreme dependences between US and other markets during the 2008 financial crisis where traditional approaches fail to do so. In addition, the estimated dependent function allows one to quantify maximum impact of the crisis on each individual market. We then propose the use of a conditional loss distribution as a constructive tool for a stress test analysis in risk management study. Stress test levels with respect to 2008 financial data calculated from the conditional loss distribution are given.},
  author       = {Tajvidi, Nader and Kiatsupaibul, Seksan and Tirapat, Sunti and Panyangam, Chonnart},
  issn         = {2424-6271},
  keyword      = {Extreme Value Distribution,Extreme Dependence,Risk Management,Stress Test},
  language     = {eng},
  number       = {1},
  pages        = {21--40},
  publisher    = {Institute of Applied Statistics, Sri Lanka},
  series       = {Sri Lankan Journal of Applied Statistics},
  title        = {Behavior of Extreme Dependence between Stock Markets when the Regime Shifts},
  url          = {http://dx.doi.org/10.4038/sljastats.v16i1.7805},
  volume       = {16},
  year         = {2015},
}