Extreme Value Dependence in Financial Markets: Diagnostics, Models, and Financial Implications

Abstract: In this paper, we use the quantile regression technique along with coexceedance, a contagion measure, to assess the extent to which news events contribute to contagion in the stock markets during the crisis period between 2007 and 2009. Studies have shown that, not only the subprime crisis leads to a global recession, but the effects on the global stock markets have also been significant. We track the news events, both in the UK and the US, using the global recession timeline. We observe that the news events related to ad hoc bailouts of individual banks from the UK have a contagion effect throughout the period for most of the countries under investigation. This, however, is not found to be the case for the news events originating from the US. Our findings regarding the evidence of contagion effects in the UK reinforce the argument that spreads and contagion—an outcome of the risk perception of financial markets—are solely a result of the behaviour of investors or other financial market participants.

TL;DR: In this paper, the authors studied the joint distributional dynamics of the four equity market factors from Fama and French (1993) and Carhart (1997) and found that the linear factor correlations are small and even negative, while the extreme correlations are large and positive.

TL;DR: Wang et al. as mentioned in this paper examined the dependence structure between crude oil market and China stock market over different investment horizons, before and after the recent financial crisis, by combining the variational mode decomposition (VMD) method with various static and time-varying copulas.

TL;DR: In this paper, the authors define total bank risk in terms of earnings volatility, which can be broken down into five major classes of risk: market, credit, asset/liability, operational, and business risks.

TL;DR: In this paper, a new parameterization of the multivariate ARCH process is proposed and equivalence relations are discussed for the various ARCH parameterizations, and conditions suffcient to guarantee the positive deffniteness of the covariance matrices are developed.

TL;DR: The authors showed that correlation coefficients are conditional on market volatility, and that there was virtually no increase in unconditional correlation coefficients (i.e., no contagion) during the 1997 Asian crisis, 1994 Mexican devaluation, and 1987 U.S. market crash.

TL;DR: In this article, a multivariate time series model with time varying conditional variances and covariances but with constant conditional correlations is proposed, which is readily interpreted as an extension of the seemingly unrelated regression (SUR) model allowing for heteroskedasticity.

TL;DR: In this paper, the authors present a survey of the main domains of attraction and norming constants in point processes and point processes, and their relationship with multivariate extremity processes.