Template-Type: ReDIF-Paper 1.0
Series: Tinbergen Institute Discussion Papers
Creation-Date: 2014-02-25
Revision-Date: 2014-06-23
Number: 14-024/III
Author-Name: Carsten Bormann
Author-Name: Melanie Schienle
Author-Workplace-Name: Leibniz Universität Hannover, Germany
Author-Name: Julia Schaumburg
Author-Workplace-Name: VU University Amsterdam
Title: A Test for the Portion of Bivariate Dependence in Multivariate Tail Risk
Abstract: In practice, multivariate dependencies between extreme risks are often only assessed in a pairwise way. We propose a test to detect when tail dependence is truly high-dimensional and bivariate simplifications would
produce misleading results. This occurs when a significant portion of the multivariate dependence structure in the tails is of higher dimension than two. Our test statistic is based on a decomposition of the stable tail dependence function, which is standard in extreme value theory for describing multivariate tail dependence.
The asymptotic properties of the test are provided and a bootstrap based finite sample version of the test is suggested. A simulation study documents the good performance of the test for standard sample sizes. In an application to international government bonds, we detect a high tail{risk and low return situation during the last decade which can essentially be attributed to increased higher{order tail risk. We also illustrate the empirical consequences from ignoring higher-dimensional tail risk.
Classification-JEL: C12, C19
Keywords: decomposition of tail dependence, multivariate extreme values, stable tail dependence function, subsample bootstrap, tail correlation
File-Url: https://papers.tinbergen.nl/14024.pdf
File-Format: application/pdf
File-Size: 1064454 bytes
Handle: RePEc:tin:wpaper:20140024