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Clustering of Extremes in Financial Returns: A Study of Developed and Emerging Markets

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  • Sara Ali Alokley

    (Department of Finance, School of Business, King Faisal University, Al-Hasa 31982, Saudi Arabia)

  • Mansour Saleh Albarrak

    (Department of Finance, College of Admiratives and Financial Sciences, Saudi Electronic University, Riyadh 13316, Saudi Arabia)

Abstract

This paper investigates the clustering or dependency of extremes in financial returns by estimating the extremal index value, in which smaller values of the extremal index correspond to more clustering. We apply the interval estimator method to determine the extremal index for a range of threshold values in the developed and emerging markets from 2007–2017. The indices we used to represent developed markets are from France, Germany, Italy, Japan, USA, UK, Spain, and Sweden. For the emerging markets, we use indices from China, Brazil, India, Malaysia, Russia, Saudi Arabia, and Portugal. The results show that clustering occurs in the emerging and developed markets under several threshold values. This study will shed light on the dependency structure of financial returns data and the proprieties of the extremes returns. Moreover, understanding clustering of extremes in these markets can help investors reduce the exposure to extreme financial events, such as the financial crisis.

Suggested Citation

  • Sara Ali Alokley & Mansour Saleh Albarrak, 2020. "Clustering of Extremes in Financial Returns: A Study of Developed and Emerging Markets," JRFM, MDPI, vol. 13(7), pages 1-11, July.
    • Handle: RePEc:gam:jjrfmx:v:13:y:2020:i:7:p:141-:d:379301
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    References listed on IDEAS

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    1. Christopher A. T. Ferro & Johan Segers, 2003. "Inference for clusters of extreme values," Journal of the Royal Statistical Society Series B, Royal Statistical Society, vol. 65(2), pages 545-556, May.
    2. Ding, Zhuanxin & Granger, Clive W. J. & Engle, Robert F., 1993. "A long memory property of stock market returns and a new model," Journal of Empirical Finance, Elsevier, vol. 1(1), pages 83-106, June.
    3. Longin, Francois M., 2000. "From value at risk to stress testing: The extreme value approach," Journal of Banking & Finance, Elsevier, vol. 24(7), pages 1097-1130, July.
    4. R. Cont, 2001. "Empirical properties of asset returns: stylized facts and statistical issues," Quantitative Finance, Taylor & Francis Journals, vol. 1(2), pages 223-236.
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