Evaluating Extreme Dependence between Tehran security exchange and international Stock Markets Using multivariate Extreme Value Theory (MEVT)

Subject Areas : Journal of Investment Knowledge

Shahram Babalooyan ¹ , Hashem Nikoomaram ² , Hamid Raza Vakilifard ³ , Fraydoon Rahnamay Roodposhty ⁴

1 - Ph.D. Candidate of Financial Management, Islamic Azad University, Science and Research Branch
2 - Prof., Financial Management Department, Islamic Azad University, Science and Research Branch
3 - Associate Prof., Financial Management Department, Islamic Azad University, Science and Research Branch
4 - Prof., Financial Management Department, Islamic Azad University, Science and Research Branch

Received: 2017-08-08 Accepted : 2018-01-01 Published : 2018-09-23

Keywords: MEVT, Extreme dependence, POT, General Pareto Distribution,

Abstract :

Estimation of extreme dependence between assets and financial markets plays a vital role in various aspects of financial risk. Extreme value theory (EVT) focuses on modeling the tail behavior of distribution using extreme values. The purpose of this paper is to investigate asymptotic dependence and estimate the degree of tail dependence of the TSE daily returns with five other international markets (DFM, S&P-500, Nikkei-225, DAX and CAC All Shares) for right and left tails of the return distribution. The degree and type of extreme dependence of these stock markets is investigated by nonparametric measures based on multivariate EVT (MEVT) for the period from 2006 to 2015. We used a vector autoregressive (VAR) and MGARCH to filter out any serial correlation and heteroskedasticity between any two return series.  The results show that Tehran security exchange (TSE) is asymptotically independent from other stock markets. Furthermore, the highest degree of positive dependence is shown between TSE and DFM in both tails.  

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