Extremal Dependence in International Output Growth: Tales from the Tails

Q: What is the key result in copula modeling?

A key result in copula modeling is Sklar’s theorem which, in its simplest form, establishes the existence and unicity of a copula C, for any given set of continuous marginals assigned to a certain joint distribution (Embrechts, 2009, Theorem 1).

Q: What are the variables that are considered as determinants of international output comovement?

On one hand, Baxter and Kouparitsas (2005) consider over one hundred countries and the variables under analysis are: bilateral trade between countries; total trade in each country; sectoral structure; similarity in export and import baskets; factor endowments; and gravity variables.

Q: What are the possible determinants of output comovement?

the authors consider as possible determinants of output comovement the following variables: (i) bilateral trade between countries; (ii) three specialization indicators; (iii) a similarity measure of monetary policy stance; and (iv) a similarity measure of fiscal policy stance.

Q: What is the significance of the characterization of extremal dependence?

As discussed by Poon et al. (2003, 2004), this extremal dependence characterization is not only consequential for a more fine understanding of the comovement of the variables during extreme events as it also brings deep implications for statistically modeling the data.

Question

1. What are the contributions in "Extremal dependence in international output growth: tales from the tails" ?

2. What is the straightforward example of a copula?

3. What is the meaning of capital letters?

4. What is the main point of view of comparative advantage trade theories?

Accepted Answer

This paper explores the comovement of the economic activity of several OECD countries during periods of large negative and positive growth.. In addition, their results suggest that, among the typical determinants for explaining international output growth synchronization, only economic specialization similarity seems to play a role during such extreme periods.

Accepted Answer

The most straightforward example of copula arises when the variables of interest are independent, so that the joint distribution function can be written as the product of the marginals, and so the corresponding copula is simply given by C(u, v) = uv, for (u, v) 2 [0, 1]2; other examples of copulas can be found, for instance, in Granger et al. (2006), and references therein.

Accepted Answer

In addition, capital letters are intended to represent ‘totals’ of the corresponding indices (for instance, T should be understood as the total number of time t periods).

Accepted Answer

From one point of view, comparative advantage trade theories postulate that increasing trade leads to a higher degree of production specialization and consequently to a lower comovement (see, for example, Krugman 1992).

Accepted Answer

Two influential papers in this respect are Baxter and Kouparitsas (2005)5Recent work makes use of extreme bounds analysis, suggested by Leamer (1983) and developed by Levine and Renelt (1992) and Sala-i-Martin (1997), to ascertain the ‘robustness’ of the determinants.

Accepted Answer

Hence4and can be seen as dual measures of joint tail dependence: if = 1 and 0 < 1, the variables are asymptotically dependent, and assesses the size of dependence within the class of asymptotically dependent distributions; if 1 < 1 and = 0, the variables are asymptotically independent, and evaluates the extent of dependence within the class of asymptotically independent distributions.

Accepted Answer

A key result in copula modeling is Sklar’s theorem which, in its simplest form, establishes the existence and unicity of a copula C, for any given set of continuous marginals assigned to a certain joint distribution (Embrechts, 2009, Theorem 1).

Accepted Answer

On one hand, Baxter and Kouparitsas (2005) consider over one hundred countries and the variables under analysis are: bilateral trade between countries; total trade in each country; sectoral structure; similarity in export and import baskets; factor endowments; and gravity variables.

Accepted Answer

the authors consider as possible determinants of output comovement the following variables: (i) bilateral trade between countries; (ii) three specialization indicators; (iii) a similarity measure of monetary policy stance; and (iv) a similarity measure of fiscal policy stance.

Accepted Answer

As discussed by Poon et al. (2003, 2004), this extremal dependence characterization is not only consequential for a more fine understanding of the comovement of the variables during extreme events as it also brings deep implications for statistically modeling the data.

Accepted Answer

By its turn, the industrial similarity measure, as suggested by Imbs (2004), is clearly important for explaining left-tail dependence whereas the intra-industry trade, used by Inklaar et al. (2008), seems to be more relevant for right-tail dependence.

Accepted Answer

This table summarizes correlation between all possible pairs of economies and thus supplies an important benchmark for comparison with tail dependence measures in the following sense: if the authors believed that a Gaussian dependence model was ruling the mechanics of the comovement of international output growth then dependence in the left and right tails should coincide with Pearson correlation coe cient.

Extremal Dependence in International Output Growth: Tales from the Tails

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Most frequently asked questions

1. What are the contributions in "Extremal dependence in international output growth: tales from the tails" ?

2. What is the straightforward example of a copula?

3. What is the meaning of capital letters?

4. What is the main point of view of comparative advantage trade theories?

5. What are the two influential papers in this respect?

6. What is the definition of a dual measure of joint tail dependence?

7. What is the key result in copula modeling?

8. What are the variables that are considered as determinants of international output comovement?

9. What are the possible determinants of output comovement?

10. What is the significance of the characterization of extremal dependence?

11. What is the significance of the industrial similarity measure?

12. What is the correlation between the left and right tails of output growth?

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Citations

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An Application of Extreme Value Theory for Measuring Financial Risk in BRICS Economies

Diversification Benefits and International Financial Contagion: The Impact of Hidden Asymptotic Dependence

References

R: A language and environment for statistical computing.

An Introduction to Copulas

A sensitivity analysis of cross-country growth regressions

An Introduction to Statistical Modeling of Extreme Values

A sensitivity analysis of cross-country growth regressions

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