Estimating the correlation of international equity markets with multivariate extreme and GARCH, CeNDEF Working paper 06-17

Abstract In this paper we study the dependence structure of extreme realization of returns between seven Asian Pasific stock markets and the USA. Methodologically, we apply the Multivariate Extreme Value theory that best suits to the problem under investigation. The main advantage of this approach is that it generates dependence measures even if the multivariate Gaussian distribution does not apply, as the case is for the tails of the high frequency stock index returns distributions. The empirical evidence suggests that conventional Constant Conditional Correlation GARCH models (Bollerslev, 1990) produce very similar results not just quantitatively but qualitatively so, as a clustering analysis showed. Dynamic Conditional Correlation GARCH models JEL Classification: G15; C10; F30

Correlation Breakdown and Extreme Dependence in Emerging Equity Markets

This study investigates the dependence structure of extreme realization of returns between the mature markets of Japan and the U.S. and the emerging markets of Cyprus, Greece and that of six Asia- Pacific counties, with the application of multivariate Extreme Value Theory that best suits to the problem under investigation. The evidence we obtain indicates that the left tail extreme correlations (downside risk) are not substantially different from the unconditional ones or from those obtained from a multivariate Dynamic Conditional Correlation GARCH model (DCC) with asymmetric GJRGARCH univariates. Moreover, a clustering analysis shows that the examined countries do not belong to a distinct block on the basis of the extreme correlations we have estimated. The policy implications are that the benefits from portfolio diversification between the Cyprus stock market and the markets of Asia-Pacific countries, Greece, Japan and the U.S. are not eroded during crisis periods, in that no “correlation breakdown” has been witnessed

Extreme returns and the contagion effect between the foreign exchange and the stock market: evidence from Cyprus

In this article we apply the Extreme Value Theory (EVT) in order to estimate the Value-at-Risk (VaR) and the correlation of extreme returns for two inherently unstable markets; the foreign exchange and the stock market. We also derive the corresponding VaR estimates from more ‘traditional’ methods of estimation on daily returns of the US dollar/Cyprus pound exchange rate and the Cyprus stock exchange general index. The main conclusion we reach is that the more heavy-tailed distributed a series is the more accurate the loss predictions are from the application of the EVT. We also show that the conditional correlation index of the extreme returns of those two markets remained almost constant throughout the backtesting period that was characterized by ‘bear’ market conditions.

The extreme-value dependence of Asia-Pacific equity markets

In this paper we study the dependence structure of extreme realization of returns between seven Asia-Pacific stock markets and the U.S. Methodologically we apply the multivariate extreme value theory that best suits to the problem under investigation. The evidence we obtain indicates that extreme correlations are not substantially different from the unconditional ones or from those obtained from multivariate GARCH models. A clustering analysis shows that the Asia-Pacific countries do not belong to a distinct block of countries on the basis of the extreme correlations we have estimated. The policy implications of our study are that the benefits from portfolio diversification with assets from the Asia-Pacific stock markets are not eroded during crisis periods, in the sense that no correlation breakdown has been observed.