Dependencies between financial asset-returns have significantly increased during recent time periods in almost all international markets. This phenomenon is a direct consequence of globalization and relaxed market regulation in finance and insurance industry. Especially during bear markets many empirical surveys like Karolyi and Stulz (1996), Longin and Solnik (2001), Campbell, Koedijk and Kofman (2002) show evidence of increasing dependencies between financial asset-returns. When investors and/or risk managers would have a better knowledge of the dependence during crises periods, they are able to make better allocation decisions and they can get a clearer view of the risks they are bearing. Estimating dependence between risky asset returns is the cornerstone of portfolio theory and many other finance applications. Common dependence measures such as Pearson’s correlation coefficient are not always suited for a proper understanding of dependencies in financial markets (Embrechts et al., 2002). In particular, dependencies between extreme events such as extreme negative stock returns or large portfolio losses cause the need for alternative dependence measures.

Several empirical surveys such as Ané, Kharoubi (2003) and Malevergne, Sornette (2004) exhibited that the concept of tail dependence is a useful tool to describe the dependence between extremal data. Tail dependence is described via the tail-dependence coefficient introduced by Sibuya (1960).

Investigating stock markets is relevant, because institutional investors (for example pension funds) often allocate more than 50% of their portfolios to stocks. So correct understanding of the dependence of asset process is important for proper risk measurement and portfolio diversification.

Motivated by these considerations in this paper our empirical results demonstrate different tail dependence structures underlying various global financial markets. Extreme dependence is defined as the dependence between extremely large returns. We concern on the structure of dependence. Structure refers to dependence as symmetric or asymmetric, tail-dependent or tail-independent.

The paper is organized as follows. Section 1 describes briefly the most important properties of stock returns. Section 2 discusses tail dependence concept and outlines the estimation method. Section 3 describe concept of tail dependence. Section 4 discusses the empirical results.

1. FULLTEXT: Analysis of tail-dependence structure in global financial markets. Extreme value theory approach, Zip archive data, at least v2.0 to extract, 0.1MB

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