Asset Market Linkages in Crisis Periods

Abstract

We characterize asset return linkages during periods of stress by an extremal dependence measure. Contrary to correlation analysis, this nonparametric measure is not predisposed toward the normal distribution and can allow for nonlinear relationships. Our estimates for the G-5 countries suggest that simultaneous crashes between stock markets are much more likely than between bond markets. However, for the assessment of financial system stability the widely disregarded cross-asset perspective is particularly important. For example, our data show that stock-bond contagion is approximately as frequent as flight to quality from stocks into bonds. Extreme cross-border linkages are surprisingly similar to national linkages, illustrating a potential downside to international financial integration. © 2004 President and Fellows of Harvard College and the Massachusetts Institute of Technology.

The Copula-GARCH model of conditional dependencies: An international stock market application

“…Next, we consider a test of asymmetry in the persistence of extreme events. Whereas Longin and Solnik (2001), Hartmann et al (2001), and Poon et al (2004) focus on the contemporaneous correlations in the tails, finding that correlation is stronger in downside markets than in upside markets, we question whether the dependency between markets is stronger subsequent to downside markets than subsequent to upside markets. Therefore, we compare the magnitude of parameters d 1 and d 16 .…”

Selecting copulas for risk management

“…Embrechts et al, 2002). An important reason to consider other copulas than the correlation-implied Gaussian copula is the failure of the correlation approach to capture dependence between extreme events, as shown by Longin and Solnik (2001), Bae et al (2003) and Hartmann et al (2004). However, up to now no consensus has been reached on which copula to use in specific applications or on how to test the accuracy of a specific copula.…”

Risk Diversification by European Financial Conglomerates

“…In the empirical section we begin by measuring the riskiness of individual Vries (2004). This involves estimating the probability of a crash by using daily stock price data.…”