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Dependence modelling of the joint extremes in a portfolio using Archimedean copulas: application to MSCI indices

Author

Listed:
  • Dominique Guegan

    (IDHE - Institutions et Dynamiques Historiques de l'Economie - ENS Cachan - École normale supérieure - Cachan - UP1 - Université Paris 1 Panthéon-Sorbonne - UP8 - Université Paris 8 Vincennes-Saint-Denis - UPN - Université Paris Nanterre - CNRS - Centre National de la Recherche Scientifique)

  • Sophie A. Ladoucette

    (IDHE - Institutions et Dynamiques Historiques de l'Economie - ENS Cachan - École normale supérieure - Cachan - UP1 - Université Paris 1 Panthéon-Sorbonne - UP8 - Université Paris 8 Vincennes-Saint-Denis - UPN - Université Paris Nanterre - CNRS - Centre National de la Recherche Scientifique)

Abstract

Using Archimedean copulas, we investigate the dependence structure existing between several series of financial assets log-returns that come from different markets. These series are considered as components of a portfolio and they are investigated on a long period including high shocks. To perform such a study, we model the tail of their joint distribution function using a dependence measure (Kendall's tau) and its relationship with the class of Archimedean copulas. Then, we define two different diagnostics to decide which copula best fits the tail of the empirical joint distribution. This approach permits us to understand the evolution of the interdependence of more than two markets in the tails, that is when extremal events corresponding to shocks induce some turmoil in the evolution of these markets.

Suggested Citation

  • Dominique Guegan & Sophie A. Ladoucette, 2005. "Dependence modelling of the joint extremes in a portfolio using Archimedean copulas: application to MSCI indices," Post-Print halshs-00189214, HAL.
    • Handle: RePEc:hal:journl:halshs-00189214
    Note: View the original document on HAL open archive server: https://shs.hal.science/halshs-00189214
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    Keywords

    portfolio; multivariate extremes; Kendall's tau; estimation theory; Archimedean copulas; Copules archimédéennes; estimation Tau de Kendall; extrêmes multivariés; portefeuille; théorie de l'estimation;
    All these keywords.

    JEL classification:

    • C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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