Economic Implications of Extreme and Rare Events

.Endogenous Probabilities; Extreme Events; Financial Environment; Informational Costs; Regime Shifts

Asymmetric Dependence in US Financial Risk Factors?

.Asymmetric Dependence; Copulas; Diversification Failure; Risk Factor; Systemic Risk; Time-Varying Downside Risk

Bankruptcy and the size effect

.Bankruptcy; Distress Risk; Financial Firms; Regime Shifts; Size Effect

Modeling international financial returns with a multivariate regime switching copula

In order to capture observed asymmetric dependence in international financial returns, we construct a multivariate regime-switching model of copulas. We model dependence with one Gaussian and one canonical vine copula regime. Canonical vines are constructed from bivariate conditional copulas and provide a very flexible way of characterizing dependence in multivariate settings. We apply the model to returns from the G5 and Latin American regions, and document two main findings. First, we discover that models with canonical vines generally dominate alternative dependence structures. Second, the choice of copula is important for risk management, because it modifies the Value at Risk (VaR) of international portfolio returns.asymmetric dependence, canonical vine copula, international returns, regime-switching, risk management, Value-at-Risk.

The Dependence Structure of Macroeconomic Variables in the US

A central role for economic policy involves reducing the incidence of systemic downturns, when key economic variables experience joint extreme events. In this paper, we empirically analyze such dependence using two approaches, correlations and copulas. We document four findings. First, linear correlations and copulas disagree substantially about the nation’s dependence structure, indicating correlation complexity in the US economy. Second, GDP exhibits linear dependence with interest rates and prices, but no extreme dependence with the latter. This is consistent with the existence of liquidity traps. Third, GDP exhibits asymmetric extreme dependence with employment, consumption and investment, with relatively greater dependence during downturns. Fourth, money is neutral, especially during extreme economic conditions.Asymmetric dependence; Copula; Correlation Complexity; Extreme Event; Economic Policy; Money Neutrality; Systemic Downturn

Modeling International Financial Returns with a Multivariate Regime Switching Copula

In order to capture observed asymmetric dependence in international financial returns, we construct a multivariate regime-switching model of copulas. We model dependence with one Gaussian and one canonical vine copula regime. Canonical vines are constructed from bivariate conditional copulas and provide a very flexible way of characterizing dependence in multivariate settings. We apply the model to returns from the G5 and Latin American regions, and document two main findings. First, we discover that models with canonical vines generally dominate alternative dependence structures. Second, the choice of copula is important for risk management, because it modifies the Value at Risk (VaR) of international portfolio returns.Asymmetric dependence; Canonical vine copula; International returns; Regime-Switching; Risk Management; Value-at-Risk

International Diversification: A Copula Approach

.Diversification; Copula; Correlation Complexity; Downside Risk; Systemic Risk

International Diversification: An Extreme Value Approach

.Diversification; Downside Risk; Correlation Complexity; Extreme Value; Systemic Risk

A Model of Endogenous Extreme Events

.Endogenous Risk; Extreme Event; Financial Congestion; Network; Public Good