Behavior of Extreme Dependence between Stock Markets when the Regime Shifts
Lund University, SE-221 00 Lund, SE
Center for Mathematical Science
Seksan Kiatsupaibul ,
Chulalongkorn University, Bangkok 10330, TH
Department of Statistics
Chulalongkorn University Bangkok 10330, TH
Department of Banking and Finance
Bangkok Life Assurance PCL, Bangkok 10310, TH
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.
Sri Lankan Journal of Applied Statistics 2015;16(1):21-40
How to Cite:
Tajvidi, N., Kiatsupaibul, S., Tirapat, S. and Panyangam, C., 2015. Behavior of Extreme Dependence between Stock Markets when the Regime Shifts. Sri Lankan Journal of Applied Statistics, 16(1), pp.21–40. DOI: http://doi.org/10.4038/sljastats.v16i1.7805
20 May 2015.