51. Beyond dimension two: A test for higher-order tail risk
- Author
-
Bormann, Carsten, Schaumburg, Julia, and Schienle, Melanie
- Subjects
tail correlation ,decomposition of tail dependence ,decomposition of multivariate tail dependence ,extreme dependence modeling ,ddc:330 ,subsample bootstrap ,C46 ,C58 ,stable tail dependence function ,multivariate extreme values ,C01 - Abstract
In practice, multivariate dependencies between extreme risks are often only assessed in a pairwise way. We propose a test for detecting situations when such pairwise measures are inadequate and give incomplete results. This occurs when a significant portion of the multivariate dependence structure in the tails is of higher dimension than two. Our test statistic is based on a decomposition of the stable tail dependence function describing multivariate tail dependence. The asymptotic properties of the test are provided and a bootstrap based finite sample version of the test is proposed. A simulation study documents good size and power properties of the test including settings with time-series components and factor models. In an application to stock indices for non-crisis times, pairwise tail models seem appropriate for global markets while the test finds them not admissible for the tightly interconnected European market. From 2007/08 on, however, higher order dependencies generally increase and require a multivariate tail model in all cases.
- Published
- 2014