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169
Extreme Correlation of International Equity Markets
 Journal of Finance
, 2001
"... Testing the hypothesis that international equity market correlation increases in volatile times is a difficult exercise and misleading results have often been reported in the past because of a spurious relationship between correlation and volatility. This paper focuses on extreme correlation, that i ..."
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Cited by 177 (0 self)
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Testing the hypothesis that international equity market correlation increases in volatile times is a difficult exercise and misleading results have often been reported in the past because of a spurious relationship between correlation and volatility. This paper focuses on extreme correlation, that is to say the correlation between returns in either the negative or positive tail of the multivariate distribution. Using “extreme value theory ” to model the multivariate distribution tails, we derive the distribution of extreme correlation for a wide class of return distributions. Using monthly data on the five largest stock markets from 1958 to 1996, we reject the null hypothesis of multivariate normality for the negative tail, but not for the positive tail. We also find that correlation is not related to market volatility per se but to the market trend. Correlation increases in bear markets, but not in bull markets.
Conditional valueatrisk for general loss distributions
 Journal of Banking and Finance
, 2002
"... Abstract. Fundamental properties of conditional valueatrisk, as a measure of risk with significant advantages over valueatrisk, are derived for loss distributions in finance that can involve discreetness. Such distributions are of particular importance in applications because of the prevalence o ..."
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Cited by 169 (19 self)
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Abstract. Fundamental properties of conditional valueatrisk, as a measure of risk with significant advantages over valueatrisk, are derived for loss distributions in finance that can involve discreetness. Such distributions are of particular importance in applications because of the prevalence of models based on scenarios and finite sampling. Conditional valueatrisk is able to quantify dangers beyond valueatrisk, and moreover it is coherent. It provides optimization shortcuts which, through linear programming techniques, make practical many largescale calculations that could otherwise be out of reach. The numerical efficiency and stability of such calculations, shown in several case studies, are illustrated further with an example of index tracking. Key Words: Valueatrisk, conditional valueatrisk, mean shortfall, coherent risk measures, risk sampling, scenarios, hedging, index tracking, portfolio optimization, risk management
The Concept of Comonotonicity in Actuarial Science and Finance: Applications
 Mathematics & Economics
, 2002
"... In an insurance c o text,o ne isoB interested in thedistributio functio o a sum o rando variables. Such a sum appears when coBBthe aggregate claimso f an insurance po rtfo o ver a certain reference perio d. Italso appears when coBdisco ted payments related to a single po licyo a poBat di#erent futur ..."
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Cited by 83 (38 self)
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In an insurance c o text,o ne isoB interested in thedistributio functio o a sum o rando variables. Such a sum appears when coBBthe aggregate claimso f an insurance po rtfo o ver a certain reference perio d. Italso appears when coBdisco ted payments related to a single po licyo a poBat di#erent future po ints in time. Theassumptio o mutual independence between the coB oB ts o the sum is very co venient fro a coB po int o view, butsoB no a realistico ne. In The Concept of Comonotonicity in Actuarial Science and Finance: Theory, we determined appro ximatio fo sumso f rando variables, when thedistributio o f the coB oB ts are kno wn, but thesto chastic dependence structure between them isunkno wn oto o cumberso to wo rk with. Practical applicatio o f thistheo will becoBin this paper. o. papers are to a large extent ano verviewo recent research resultsos tained by theautho butalso newtheoBand practical results are presented. 1
CopulaDependent Default Risk in Intensity Models
 WORKING PAPER, DEPARTMENT OF STATISTICS, BONN UNIVERSITY
, 2001
"... In this paper we present a new approach to incorporate dynamic default dependency in intensitybased default risk models. The model uses an arbitrary default dependency structure which is specified by the Copula of the times of default, this is combined with individual intensitybased models for ..."
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Cited by 66 (1 self)
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In this paper we present a new approach to incorporate dynamic default dependency in intensitybased default risk models. The model uses an arbitrary default dependency structure which is specified by the Copula of the times of default, this is combined with individual intensitybased models for the defaults of the obligors without loss of the calibration of the individual defaultintensity models. The dynamics of the survival probabilities and credit spreads of individual obligors are derived and it is shown that in situations with positive dependence, the default of one obligor causes the credit spreads of the other obligors to jump upwards, as it is experienced empirically in situations with credit contagion. For the
Dependence Structures for Multivariate HighFrequency Data in Finance. Quantitative Finance 3
, 2003
"... www.math.ethz.ch/finance Stylised facts for univariate high–frequency data in finance are well–known. They include scaling behaviour, volatility clustering, heavy tails, and seasonalities. The multivariate problem, however, has scarcely been addressed up to now. In this paper, bivariate series of hi ..."
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Cited by 54 (4 self)
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www.math.ethz.ch/finance Stylised facts for univariate high–frequency data in finance are well–known. They include scaling behaviour, volatility clustering, heavy tails, and seasonalities. The multivariate problem, however, has scarcely been addressed up to now. In this paper, bivariate series of high–frequency FX spot data for major FX markets are investigated. First, as an indispensable prerequisite for further analysis, the problem of simultaneous deseasonalisation of high–frequency data is addressed. In the bulk of the paper we analyse in detail the dependence structure as a function of the time scale. Particular emphasis is put on the tail behaviour, which is investigated by means of copulas and spectral measures. 1
The t copula and related copulas
 INTERNATIONAL STATISTICAL REVIEW
, 2005
"... The t copula and its properties are described with a focus on issues related to the dependence of extreme values. The Gaussian mixture representation of a multivariate t distribution is used as a starting point to construct two new copulas, the skewed t copula and the grouped t copula, which allow m ..."
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Cited by 52 (0 self)
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The t copula and its properties are described with a focus on issues related to the dependence of extreme values. The Gaussian mixture representation of a multivariate t distribution is used as a starting point to construct two new copulas, the skewed t copula and the grouped t copula, which allow more heterogeneity in the modelling of dependent observations. Extreme value considerations are used to derive two further new copulas: the t extreme value copula is the limiting copula of componentwise maxima of t distributed random vectors; the t lower tail copula is the limiting copula of bivariate observations from a t distribution that are conditioned to lie below some joint threshold that is progressively lowered. Both these copulas may be approximated for practical purposes by simpler, betterknown copulas, these being the Gumbel and Clayton copulas respectively.
PairCopula Constructions of Multiple Dependence
"... Building on the work of Bedford, Cooke and Joe, we show how multivariate data, which exhibit complex patterns of dependence in the tails, can be modelled using a cascade of paircopulae, acting on two variables at a time. We use the paircopula decomposition of a general multivariate distribution an ..."
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Cited by 42 (12 self)
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Building on the work of Bedford, Cooke and Joe, we show how multivariate data, which exhibit complex patterns of dependence in the tails, can be modelled using a cascade of paircopulae, acting on two variables at a time. We use the paircopula decomposition of a general multivariate distribution and propose a method to perform inference. The model construction is hierarchical in nature, the various levels corresponding to the incorporation of more variables in the conditioning sets, using paircopulae as simple building blocs. Paircopula decomposed models also represent a very exible way to construct higherdimensional coplulae. We apply the methodology to a nancial data set. Our approach represents the rst step towards developing of an unsupervised algorithm that explores the space of possible paircopula models, that also can be applied to huge data sets automatically.
Beyond Correlation: Extreme Comovements Between Financial Assets
, 2002
"... This paper inv estigates the potential for extreme comov ements between financial assets by directly testing the underlying dependence structure. In particular, a tdependence structure, deriv ed from the Student t distribution, is used as a proxy to test for this extremal behav#a(0 Tests in three ..."
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Cited by 34 (5 self)
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This paper inv estigates the potential for extreme comov ements between financial assets by directly testing the underlying dependence structure. In particular, a tdependence structure, deriv ed from the Student t distribution, is used as a proxy to test for this extremal behav#a(0 Tests in three di#erent markets (equities, currencies, and commodities) indicate that extreme comov ements are statistically significant. Moreov er, the "correlationbased" Gaussian dependence structure, underlying the multiv ariate Normal distribution, is rejected with negligible error probability when tested against the tdependencealternativ e. The economic significance of these results is illustratedv ia three examples: comov ements across the G5 equity markets; portfoliov alueatrisk calculations; and, pricing creditderiv ativ es. JEL Classification: C12, C15, C52, G11. Keywords: asset returns, extreme comov ements, copulas, dependence modeling, hypothesis testing, pseudolikelihood, portfolio models, risk management. # The authorsw ould like to thankAndrew Ang, Mark Broadie, Loran Chollete, and Paul Glasserman for their helpful comments on an earlier version of this manuscript. Both authors arewS; the Columbia Graduate School of Business, email: {rm586,assaf.zeevi}@columbia.edu, current version available at www.columbia.edu\# rm586 1 Introducti7 Specification and identification of dependencies between financial assets is a key ingredient in almost all financial applications: portfolio management, risk assessment, pricing, and hedging, to name but a few. The seminal work of Markowitz (1959) and the early introduction of the Gaussian modeling paradigm, in particular dynamic Brownianbased models, hav e both contributed greatly to making the concept of co rrelatio almost synony...
Extreme Value Theory: Potential And Limitations As An Integrated Risk Management Tool
 Derivatives Use, Trading & Regulation
, 2000
"... . Extreme Value Theory (EVT) is currently very much in the focus of interest in quantitative risk management. Originally conceived as the mathematical (probabilistic/statistical) theory for analysing rare events, it recently entered the risk management stage. In this paper I discuss some of the i ..."
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Cited by 33 (0 self)
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. Extreme Value Theory (EVT) is currently very much in the focus of interest in quantitative risk management. Originally conceived as the mathematical (probabilistic/statistical) theory for analysing rare events, it recently entered the risk management stage. In this paper I discuss some of the issues (mainly, but not exclusively) related to Value{at{Risk methodology. I try to come up with a virtues versus limitations assessment, both from an academic as well as from an end{user point of view. 1. Introduction Without any doubt, Value{at{Risk (VaR) thinking has revolutionised Integrated Risk Management (IRM), both at the quantitative (obvious) and at the qualitative (not so obvious) level. Originally conceived as a one{number summary of (short term) Market Risk, it is now being used in many dierent risk management systems like Credit Risk (Credit{VaR) and Operational Risk. Even the insurance world which could claim, through its actuarial skills, to be the master of risk, has im...
Modelling Dependent Defaults
 RISK
, 2000
"... We consider the modelling of dependent defaults using latent variable models (the approach that underlies KMV and CreditMetrics) and mixture models (the approach underlying CreditRisk+). We explore the role of copulas in the latent variable framework and present results from a simulation study sh ..."
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Cited by 31 (6 self)
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We consider the modelling of dependent defaults using latent variable models (the approach that underlies KMV and CreditMetrics) and mixture models (the approach underlying CreditRisk+). We explore the role of copulas in the latent variable framework and present results from a simulation study showing that even for fixed asset correlation assumptions concerning the dependence of the latent variables can have a large effect on the distribution of credit losses. We explore the effect of the tail of the mixingdistribution for the tail of the creditloss distributions. Finally, we discuss the relation between latent variable models and mixture models and provide general conditions under which these models can be mapped into each other. Our contribution can be viewed as an analysis of the model risk associated with the modelling of dependence between credit losses.