Journal Article10.1093/RFS/HHG058
Extreme Value Dependence in Financial Markets: Diagnostics, Models, and Financial Implications
TL;DR: In this article, the authors present a general framework for identifying and modeling the joint-tail distribution based on multivariate extreme value theories, arguing that the multivariate approach is the most efficient and effective way to study extreme events such as systemic risk and crisis.
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Abstract: This article presents a general framework for identifying and modeling the joint-tail distribution based on multivariate extreme value theories. We argue that the multivariate approach is the most efficient and effective way to study extreme events such as systemic risk and crisis. We show, using returns on five major stock indices, that the use of traditional dependence measures could lead to inaccurate portfolio risk assessment. We explain how the framework proposed here could be exploited in a number of finance applications such as portfolio selection, risk management, Sharpe ratio targeting, hedging, option valuation, and credit risk analysis.
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Citations
Sparse Structures for Multivariate Extremes
TL;DR: Extreme value statistics provides accurate estimates for the small occurrence probabilities of rare events as mentioned in this paper, and has been used for univariate extreme value statistics for the prediction of extreme events in the literature.
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Crash Sensitivity and Cross-Section of Expected Stock Returns
Fousseni Chabi-Yo,Stefan Ruenzi,Florian Weigert +2 more
- 01 Jan 2018
TL;DR: In this article, the authors examined whether investors receive compensation for holding crash-sensitive stocks and found that stocks with weak LTD serve as a hedge during crises, but, overall, stocks with strong LTD have higher average future returns.
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Tail dependence and indicators of systemic risk for large US depositories
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Long Memory and Tail dependence in Trading Volume and Volatility
TL;DR: In this article, the authors investigated long-run dependencies of volatility and volume, assuming that volume and volatility are driven by a common fractionally integrated stochastic trend, as the Mixture Distribution Hypothesis prescribes.
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The Pricing of Tail Risk and the Equity Premium: Evidence from International Option Markets
TL;DR: In this paper, the authors explore the pricing of tail risk as manifest in index options across international equity markets and find that the risk premium associated with negative tail events displays persistent shifts, unrelated to volatility.
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