Tail Dependence

Eidgenössische Technische Hochschule Zürich
Swiss Federal Institute of Technology Zurich
Master Thesis
Tail Dependence:
Implementation, Analysis, and Study
of the most recent concepts
Sebastian N. Schmuki
Department of Management, Technology, and Economics - DMTEC

Chair of Entrepreneurial Risks - ER
Supervisors:
Prof. Dr. Didier Sornette
Prof. Dr. Yannick Malevergne
October 2008
Acknowledgements
I would like to thank Prof. Dr. Didier Sornette (Chair of Entrepreneurial Risks, ETH
Zürich) and Prof. Dr. Yannick Malevergne (EM Lyon Business School, Dept. Economics,
Finance & Control) for their motivating way of supervising this thesis. I’am very
grateful for their support, suggestions, and guidance, which gave me insights into many
new fields and made the completion of this thesis possible.
2
Abstract
Recent events i.e. severe market crashes have shown that there is a need for action in
financial risk management to quantify dependences between extreme events. So far,
there is no generally applied measure for extreme financial risks.
The concept of tail dependence represents a powerful means to describe the amount of
extreme co-movements between asset prices. Several approaches for the estimation of
the tail dependence coefficient were developed.
It is the purpose of this work to review and implement the most recent concepts for
the estimation of tail dependence and to study their relevance for practical applications
providing a complete analysis of the different approaches on historical and synthetic
time series.
Programs for the implementation of the discussed concepts are enclosed to the appendix
as Matlab m-codes allowing the non-expert reader to apply them to his own purposes.
Contents
1 Introduction 2
1.1 Motivation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.2 Thesis Outline . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
2 Important Concepts used in Multivariate Extreme Value Theory 4

2.1 Multivariate Extreme Value Distributions . . . . . . . . . . . . . . . . . 5
2.2 The Survival Function . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
2.3 Multivariate Dependence . . . . . . . . . . . . . . . . . . . . . . . . . . 6
2.3.1 Positive Orthant Dependence . . . . . . . . . . . . . . . . . . . 6
2.3.2 Quadrant Dependence . . . . . . . . . . . . . . . . . . . . . . . 7
2.3.3 Associated Variables . . . . . . . . . . . . . . . . . . . . . . . . 7
2.4 Copulas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
2.4.1 Copula and Survival Copula . . . . . . . . . . . . . . . . . . . . 9
2.4.2 Empirical Copula . . . . . . . . . . . . . . . . . . . . . . . . . . 9
2.5 Tail Dependence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
3 Concepts for the Estimation of Tail Dependence 11

3.1 Approaches according to Poon, Rockinger, and Tawn . . . . . . . . . . 12
3.1.1 Theoretical Background . . . . . . . . . . . . . . . . . . . . . . 12
3.1.2 Implementation of Non-Parametric χ and χ . . . . . . . . . . . 15
3.2 Approaches according to Sornette and Malevergne . . . . . . . . . . . . 21
3.2.2 Implementation of the Non-Parametric Approach . . . . . . . . 31
3.2.3 Analysis of TDC estimated by the Non-Parametric Approach . . 34
3.2.4 Implementation of the Parametric Approach . . . . . . . . . . . 57
3.2.5 Analysis of TDC estimated by the Parametric Approach . . . . 66
3.3 β-Smile Improvement . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75
3.4 Non-Parametric Approaches according to
Schmidt & Stadtmüller . . . . . . . . . . . . . . . . . . . . . . . . . . . 104
3.4.2 Implementation of Non-Parametric Approaches . . . . . . . . . 105
3.4.3 Analysis of Coefficients . . . . . . . . . . . . . . . . . . . . . . . 107
3.5 Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 124
4 Application of Concepts to various Data and Purposes 127

4.1 Application to major Financial Centers in the World . . . . . . . . . . 127
4.2 Application to Exchange Rates . . . . . . . . . . . . . . . . . . . . . . 142
4.3 Application to Synthetic Time Series . . . . . . . . . . . . . . . . . . . 147
5 Concluding Remarks 156
4
Appendix 160
M-Files . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 160
Descriptive Statistics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 171
List of Figures
3.1 Tail index estimators ν̂ (Hill’s estimator) for the upper tails of index
S&P 500 and 9 major assets included plotted in dependence of threshold
k on a time interval ranging from July 1985 to April 2008. . . . . . . . 25
3.2 Tail index estimators b̂γn (Gabaix’s estimator) for the upper tails of index
3.3 Tail index estimators ν̂ (Hill’s estimator) for the lower tails of index S&P
500 and 9 major assets included plotted in dependence of threshold k on
a time interval ranging from July 1985 to April 2008. . . . . . . . . . . 26
3.4 Tail index estimators b̂γn (Gabaix’s estimator) for the lower tails of index
3.5 ˆl(k) = Xk,N /Yk,N with k = 1 . . . 150 (k/N = 0% . . . 6%) for the lower
tail of all assets with the index S&P 500 on the smaller data set ranging
from January 1991 up to December 2000. . . . . . . . . . . . . . . . . . 32
ˆ P Xj,N
3.6 l(k) = k1 kj=1 Yj,N with k = 1 . . . 150 (or k/N = 0% . . . 6%) for the lower
tail of all assets with the index S&P 500 on the smaller data set ranging
from January 1991 up to December 2000. . . . . . . . . . . . . . . . . . 32
ˆ 1
Pk Xj,N
3.7 l(k)c = k−c+1 j=Y Yj,N with k = 13 . . . 150 (or k/N = 0.5% . . . 6%),
and c = [0.05 · N] ([·] denotes integer numbers) applied to the lower tail
of all assets with the index S&P 500 on the smaller data set ranging from
January 1991 up to December 2000. . . . . . . . . . . . . . . . . . . . . 33
1
3.8 λ̂(k) = n
l
o ν̂ with k = 1 . . . 343 (or k/N = 0% . . . 6%), applied to
max 1,
β̂
the lower tail of all assets with the index S&P 500 on the bigger data set
ranging from July 1985 to April 2008. . . . . . . . . . . . . . . . . . . . 37
1
3.9 λ(k) = ν̂ with k = 1 . . . 343 (or k/N = 0% . . . 6%), applied to
max 1, l̂
β̂
the lower tail of all assets with the index S&P 500 on the bigger data set
1
3.10 λ(k) = ν̂ with k = 29 . . . 343 (or k/N = 0.5% . . . 6%) and c =
max 1, l̂c
β̂
[0.005 · N] ([·] denotes integer numbers), applied to the lower tail of all
assets with the index S&P 500 on the bigger data set ranging from July
1985 to April 2008. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
3.11 β(N) estimated for 9 assets X and index S&P 500 Y using the linear
single factor model: X = β·Y +ε for rolling time horizon windows of S =
2500 considered data points from N = (1 . . . S), (2 . . . S + 1), . . . , (5736 −
S + 1 . . . 5736) or a total time interval from July 1985 to Mars 2008. . . 43
II
3.14 Constant lU (N) for upper tails plotted in green and constant lL (N) for
lower tails plotted in black estimated for 9 assets and index S&P 500
P
using relation: ˆl(k) = k1 kj=1 Xj,S /Yj,S with k = 0.04 · S, Xj,S and Yj,S
rank ordered return observations, and rolling time horizon window of S =
P
using: ˆl(k) = k1 kj=1 Xj,S /Yj,S with k = 0.04 · S, Xj,S and Yj,S rank
ordered return observations, and rolling time horizon window of S =
P
using: ˆl(k) = k1 kj=1 Xj,S /Yj,S with k = 0.04 · S, Xj,S and Yj,S rank
ordered return observations, and rolling time horizon window of S = 800
considered data points from N = (1 . . . S), (2 . . . S + 1), . . . , (5736 − S +
1 . . . 5736) or a total time interval from July 1985 to Mars 2008. . . . . 45
3.17 νk,U (N) for upper tail of index S&P 500 plotted in red and νk,L (N)
for lower
tail plotted in black using Hill’s estimator given by equation
−1
1
Pk Yj,S
ν̂ = k j=1 log Yk,N with k = 0.04 · S and Xj,S and Yj,S rank or-
dered return observations for rolling time horizon windows of S = 2500
3.18 νk,U (N) for upper tail of index S&P 500 plotted in red and νk,L (N)
for lower
tail plotted in black using Hill’s estimator given by equation
−1
1
P k Yj,S
ν̂ = k j=1 log Yk,N with k = 0.04 · S and Xj,S and Yj,S rank or-
dered return observations for rolling time horizon windows of S = 1600
3.19 νk,U (N) for upper tail of index S&P 500 plotted in red and νk,L (N) for
lower tail plotted in black using Hill’s estimator given by equation ν̂ =
−1
1
Pk Yj,S
k j=1 log Yk,N
with k = 0.04 · S and Xj,S and Yj,S rank ordered re-
turn observations for rolling time horizon windows of S = 800 considered
data points from N = (1 . . . S), (2 . . . S + 1), . . . , (5736 − S + 1 . . . 5736)
or a total time interval from July 1985 to Mars 2008. . . . . . . . . . . 47
3.20 λU (N) for the upper tails of index S&P 500 and the nine assets plotted
in blue and λL (N) for the lower tails plotted in red using non-parametric
n oν̂
approach given by equation λ̂+,− = 1/ max 1, βl with coefficients ν̂,
l and β for rolling time horizon windows of S = 2500 considered data
points from N = (1 . . . S), (2 . . . S + 1), . . . , (5736 − S + 1 . . . 5736) or a
total time interval from July 1985 to Mars 2008. . . . . . . . . . . . . . 48
n oν̂
approach given by equation λ̂+,− = 1/ max 1, βl with coefficients ν̂,
n oν̂
+,− l
approach given by equation λ̂ = 1/ max 1, β with coefficients ν̂,
3.23 λU (N) for the upper tails of index S&P 500 and the nine assets for rolling
time horizon windows of size S = 2500 plotted in black, S = 1600 plotted
in blue, and S = 800 plotted in red using non-parametric approach given
n oν̂
by equation λ̂+,− = 1/ max 1, βl with coefficients ν̂, l and β from
N = (2501 − S . . . S), (2502 . . . S + 1), . . . , (5736 − S + 1 . . . 5736). . . . 51
3.24 λL (N) for the lower tails of index S&P 500 and the nine assets for rolling
time horizon windows of size S = 2500 plotted in black, S = 1600 plotted
in blue, and S = 800 plotted in red using non-parametric approach given
n oν̂
by equation λ̂+,− = 1/ max 1, βl with coefficients ν̂, l and β from
N = (2501 − S . . . S), (2502 . . . S + 1), . . . , (5736 − S + 1 . . . 5736). . . . 52
3.25 Return data for index S&P 500 ranging from January 1950 to April 2008 55
3.26 Autocorrelation for a return series on the left and for a squared return
series on the right of index S&P 500 ranging from January 1950 to April
2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
3.27 Scale factors ĈY (k) = Nk · (Yk,N )ν̂ of the index S&P 500 and Ĉε(k) =
k
N
· (εk,N )ν̂ of the nine assets’ residues plotted for the upper tails of the
bigger data set ranging from July 1985 to April 2008 with k=1, 2,. . . ,
458 (k/N = 0% . . . 8%). . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
ˆγ
3.28 Scale factors ĈY (k) = Nk · (Yk,N )bn of the index S&P 500 and Ĉε(k) =
k ˆγ
N
· (εk,N )bn of the nine assets’ residues plotted for the upper tails of the
bigger data set ranging from July 1985 to April 2008 with k=1, 2,. . . ,
458 (k/N = 0% . . . 8%). . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
1/α
ε
3.29 Fraction of scale factors ĈĈε (k) = Yk,N of the nine assets’ residues
Y (k) k,N
and the index S&P 500, plotted for the upper tails of the bigger data
set ranging from July 1985 to April 2008 with k=1, 2,. . . , 458 (k/N =
0% . . . 8%). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
1/α
3.30 Fraction of scale factors Ĉ ε of the nine assets’ residues and the
Ĉ Y
index S&P 500, plotted for the upper tails of the bigger data set ranging
from July 1985 to April 2008 with k=1, 2,. . . , 458 (k/N = 0% . . . 8%). . 59
3.31 Empirical complementary cumulative distribution functions F ε,empirical =
k
N
plotted in red and parametric complementary cumulative distribution
functions F ε,parametric = Ĉε ·ε−ν̂ with Ĉε for (k/N = 4%) plotted in black
for k/N = 4% . . . 0% (from left to right) in dependence of returns for the
upper tails of the nine assets. . . . . . . . . . . . . . . . . . . . . . . . 61
3.32 Empirical complementary cumulative distribution functions F ε,empirical =
k
N
plotted in red and parametric complementary cumulative distribu-
1
Pk
tion functions F ε,parametric = Ĉ ε,c · ε−ν̂ with Ĉ ε,c = k−c j=c Ĉε for
c = 0.005 · N plotted in black for k/N = 4% . . . 0% (from left to right)
in dependence of returns for the upper tails of the nine assets. . . . . . 62
3.33 Empirical complementary cumulative distribution functions F εi ,empirical =
k
N
plotted in green and parametric complementary cumulative distribu-
γ
tion functions F ε,parametric = Ĉε · ε−b̂n with Ĉε for (k/N = 4%) plotted
in black for the upper tails of k/N = 4% . . . 0% in dependence of returns
for the nine assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63
k
N
plotted in green and parametric complementary cumulative distribu-
γ
1
Pk
tion functions F ε,parametric = Ĉ ε,c · ε−b̂n with Ĉ ε,c = k−c j=c Ĉε for
c = 0.005 · N plotted in black for k/N = 4% . . . 0% in dependence of
returns for the upper tails of the nine assets. . . . . . . . . . . . . . . . 64
1
3.35 λ̂ = 1+β̂ −ν̂ · Cε
with k = 1 . . . 458 (or k/N = 0% . . . 8%), applied to the
Cy
lower tails of all assets with the index S&P 500 on the bigger data set
1
3.36 λ = Ĉ ε
with k = 1 . . . 458 (or k/N = 0% . . . 8%), applied to the
1+β̂ −ν̂ ·
Ĉ y
lower tails of all assets with the index S&P 500 on the bigger data set
1
3.37 λ = Ĉ ε,c
with k = 29 . . . 458 (or k/N = 0.5% . . . 8%), and c =
1+β̂ −ν̂ ·
Ĉ y,c
[0.005 · N] ([·] denotes integer numbers) applied to the lower tails of all
assets with the index S&P 500 on the bigger data set ranging from July
1985 to April 2008. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67
k
N
P
functions F ε,parametric = Ĉ ε · ε−ν̂ with Ĉ ε = k1 kj=1 Ĉε plotted in black
for k/N = 4% . . . 0% (from left to right) in dependence of returns for the
lower tails of the nine assets for a time interval ranging from January
1991 to December 2000. . . . . . . . . . . . . . . . . . . . . . . . . . . 71
k
N
1
Pk
tion functions F εi ,parametric = Ĉ ε, c · ε−ν̂ with Ĉ ε,c = k−c j=c Ĉε for
c = 0.005 · N plotted in black for k/N = 4% . . . 0% (from left to right)
in dependence of returns for the lower tails of the nine assets for a time
interval ranging from January 1991 to December 2000. . . . . . . . . . 72
k
N
P
functions F ε,parametric = Ĉ ε · ε−ν̂ with Ĉ ε = k1 kj=1 Ĉε plotted in black
for k/N = 4% . . . 0% in dependence of returns for the lower tails of the
nine assets for a time interval ranging from January 1991 to December
2000. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73
k
N
1
Pk
tion functions F εi ,parametric = Ĉ ε, c · ε−ν̂ with Ĉ ε,c = k−c j=c Ĉε for
c = 0.005 · N plotted in black for k/N = 4% . . . 0% in dependence of
returns for the lower tails of the nine assets for a time interval ranging
from January 1991 to December 2000. . . . . . . . . . . . . . . . . . . . 74
3.42 β̂SI (k) of the upper tails plotted in blue and of the lower tails plotted in
black calculated by least square method applied on linear additive single
factor model: X = β·Y +ε and first SI condition: Y ≥ Y (k)∩X ≥ X(k)
in dependence of threshold k. Reference β̂ calculated for all data is given
in green. Y denotes the index return vector of S&P 500 and Y denotes
asset return vector of the nine assets for a time interval ranging from
January 1991 to December 2000. . . . . . . . . . . . . . . . . . . . . . . 80
factor model: X = β · Y + ε and second SI condition: Y ≥ Y (k) in
dependence of threshold k. Reference β̂ calculated for all data is given
factor model: X = β · Y + ε and third SI condition: X ≥ X(k) in
dependence of threshold k. Reference β̂ calculated for all data is given
factor model: X = β · Y + ε and fourth SI condition: Y ≥ Y (k) ∪ X ≥
X(k) in dependence of threshold k. Reference β̂ calculated for all data
is given in green. Y denotes the index return vector of S&P 500 and Y
denotes asset return vector of the nine assets for a time interval ranging
3.46 β̂SI (k) calculated by the first condition: Y ≥ Y (k) ∩ X ≥ X(k) plotted
in blue and by the second condition: Y ≥ Y (k) plotted in black for the
upper tail calculated by least squares method applied on linear additive
single factor model: X = β · Y + ε in dependence of threshold k for
k/N = 3% . . . 6%. Reference β̂ calculated for all data is given in green.
Y denotes the index return vector of S&P 500 and Y denotes asset
return vector of the nine assets for a time interval ranging from January
1991 to December 2000. . . . . . . . . . . . . . . . . . . . . . . . . . . 85
lower tail calculated by least squares method applied on linear additive
return vector of the nine assets for a time interval ranging from January
1991 to December 2000. . . . . . . . . . . . . . . . . . . . . . . . . . . 86
upper tail calculated by least squares method applied on linear additive
return vector of the nine assets for a time interval ranging from July
1985 to Mars 2008. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87
lower tail calculated by least squares method applied on linear additive
return vector of the nine assets for a time interval ranging from July
1985 to Mars 2008. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88
3.50 λ̂+ (k) for the upper tail of the nine assets and the index S&P 500 is
plotted in black for β̂(k) calculated by least squares method applied to
linear additive single factor model: X = β·Y +ε and adapted to the first
condition: Y ≥ Y (k) ∩ X ≥ X(k), ν̂(k = 4%) and ˆl(k) in dependence
of threshold k for k/N = 3% . . . 10%, in blue for β̂(k) and ˆl(k) adapted
to the first SI condition for comparison, in green for Reference β̂ and
ˆl(k), and for Reference λ̂+ (k = 4%) is given in red. Y denotes the index
return vector of S&P 500 and X denotes asset return vector of the nine
assets for a time interval ranging from January 1991 to December 2000. 90
3.51 λ̂+ (k) for the lower tail of the nine assets and the index S&P 500 is
linear additive single factor model: X = β·Y +ε and adapted to the first
condition: Y ≥ Y (k) ∩ X ≥ X(k), ν̂(k = 4%) and ˆl(k) in dependence
of threshold k for k/N = 3% . . . 10%, in blue for β̂(k) and ˆl(k) adapted
3.52 λ̂+ (k) for the upper tail of the nine assets and the index S&P 500 is
linear additive single factor model: X = β · Y + ε and adapted to the
second condition: Y ≥ Y (k), ν̂(k = 4%) and ˆl(k) in dependence of
threshold k for k/N = 3% . . . 10%, in blue for β̂(k) and ˆl(k) adapted
3.53 λ̂+ (k) for the lower tail of the nine assets and the index S&P 500 is
linear additive single factor model: X = β · Y + ε and adapted to the
second condition: Y ≥ Y (k), ν̂(k = 4%) and ˆl(k) in dependence of
threshold k for k/N = 3% . . . 10%, in blue for β̂(k) and ˆl(k) adapted
3.54 β̂SI (N) plotted in black for the upper tails and plotted in green for the
lower tails for 9 assets given by X and index S&P 500 given by Y using
the linear single factor model: X = β · Y + ε and the first SI condition:
Y ≥ Y (k) ∩ X ≥ X(k) for rolling time horizon windows of S = 2500
3.55 β̂SI (N) plotted in black for the upper tails and plotted in green for the
lower tails for 9 assets given by X and index S&P 500 given by Y using
the linear single factor model: X = β ·Y +ε and the second SI condition:
Y ≥ Y (k) for rolling time horizon windows of S = 2500 considered data
3.56 λ+ (N) for upper tails of index S&P 500 and the nine assets plotted
in blue and λ− (N) for lower tails plotted in red using non-parametric
n oν̂
l
approach given by equation λ̂+,− = 1/ max 1, β̂ +,− with coefficients
SI
+,−
ν̂, l, and β̂SI for rolling time horizon windows of S = 2500 considered
data points from N = (1 . . . S), (2 . . . S +1), . . . , (5736−S +1 . . . 5736) or
+,−
a total time interval from July 1985 to Mars 2008. β̂SI were calculated
using the linear single factor model: X = β · Y + ε and the first SI
condition: Y ≥ Y (k) ∩ X ≥ X(k). . . . . . . . . . . . . . . . . . . . . . 102
3.57 λ+ (N) for upper tail of index S&P 500 and the nine assets plotted in blue
and λ− (N) for lower tail plotted in red using non-parametric approach
n oν̂
l
given by equation λ̂+,− = 1/ max 1, β̂ +,− with coefficients ν̂, l, and
SI
+,−
β̂SI for rolling time horizon windows of S = 2500 considered data points
from N = (1 . . . S), (2 . . . S +1), . . . , (5736−S +1 . . . 5736) or a total time
+,−
interval from July 1985 to Mars 2008. β̂SI were calculated using the
linear single factor model: X = β · Y + ε and the second SI condition:
Y ≥ Y (k). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 103
3.58 λ̂U,m for upper tails of index S&P 500 and the nine assets plotted in black
and λ̂EV T
U,m for upper tails plotted in red, both in dependence of threshold
k on an interval from k/m = 0% . . . 6% for m = 2507 daily return values
during a time interval ranging from January 1991 to December 2000. . 109
3.59 λ̂L,m for lower tails of index S&P 500 and the nine assets plotted in black
and λ̂EV T
L,m for lower tails plotted in red, both in dependence of threshold
k on an interval from k/m = 0% . . . 6% for m = 2507 daily return values
during a time interval ranging from January 1991 to December 2000. . 110
3.60 Smoothed λ̂L,m plotted in black and smoothed λ̂U,m plotted in green for
the nine assets with the index S&P 500 given for the most extreme 8%
during a time interval from January 1991 to December 2000. Smoothing
is performed by locally weighted scatter plot smooth using least squares
quadratic polynomial fitting filters with 25 considered data points by
step or [0.125 · 0.08 · m] values with a total of m = 2507 data points and
[·] denoting integer numbers. . . . . . . . . . . . . . . . . . . . . . . . . 112
3.61 Smoothed λ̂L,m plotted in black and smoothed λ̂U,m plotted in green
for the nine assets with the index S&P 500 given for the most extreme
8% during a time interval from July 1985 to April 2008. Smoothing is
performed by locally weighted scatter plot smooth using least squares
quadratic polynomial fitting filters with 57 considered data points by
step or [0.125 · 0.08 · m] values with a total of m = 5736 data points and
[·] denoting integer numbers. . . . . . . . . . . . . . . . . . . . . . . . . 113
3.62 Lower tail dependence λL (θ) = 2−1/θ and corresponding asymptotic vari-
ance σL2 (θ) = 2−1/θ − 23 4−1/θ + 12 8−1/θ for the Pareto copula. . . . . . . . 114
3.63 λU,m (m) for upper tails of index S&P 500 and the nine assets plotted in
green and λL,m (m) for lower tails plotted in black using a non-parametric
P
approach given by equation λ̂L,m = k1 m j=1 1R(j) (j) and λ̂U,m =
Pm m1 ≤k and Rm2 ≤k
1
k j=1 1R(j) (j) for rolling time horizon windows of S =
m1 >m−k and Rm2 >m−k
P
1
P
1
3.66 λL,m (N) for lower tails of index S&P 500 and the nine assets for rolling
time horizon windows of size S = 2500 plotted in blue, S = 1600
plotted in green, and S = 800 plottedPin red using a non-parametric
approach given by equation λ̂U,m = k1 m j=1 1R(j) (j) from
N = (2501 − S . . . S), (2502 . . . S + 1), . . . , (5736 − S + 1 . . . 5736). . . . 122
3.67 λU,m (N) for lower tails of index S&P 500 and the nine assets for rolling
time horizon windows of size S = 2500 plotted in blue, S = 1600 plotted
in green, and S = 800 plotted Pin red a using non-parametric approach
given by equation λ̂L,m = k1 m j=1 1R(j) (j) from N = (2501 −
m1 ≤k and Rm2 ≤k
S . . . S), (2502 . . . S + 1), . . . , (5736 − S + 1 . . . 5736). . . . . . . . . . . . 123
4.1 Non-parametric probability density distribution functions of index S&P
500, assets CVX (Chevron Corp.), and a synthetic sample estimated
using a Gaussian box kernel for a time interval of N = 2507 data points
ranging from January 1991 to December 2000. . . . . . . . . . . . . . . 149
4.2 Non-parametric probability density distribution functions of index S&P
500, assets CVX (Chevron Corp.), and a synthetic sample plotted on
a semi-log scale and estimated using a Gaussian box kernel for a time
interval of N = 2507 data points ranging from January 1991 to December
2000. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 149
List of Tables
3.1 Estimated values of upper and lower tail dependence for S&P 500 index
with a set of nine major assets traded on the New York stock Exchange
Z ·k
calculated by a non-parametric approach: χ̂+,− = k,N and correspond-
q N
2
Zk,N k(N −k)
ing standard deviation: σ̂ (χ̂) = N3
. The tail represents the
most extreme 4% of the return values during a time interval from Jan-
uary 1991 to December 2000. ’tail’ shows the calculation interval of L
with c = 13 and k = 100, and ∗ denotes χ̂ 6= 1 and therefore χ̂ = 0. . . 18
Z ·k
calculated by a non-parametric approach: χ̂+,− = k,N and correspond-
q N
2
Zk,N k(N −k)
ing standard deviation: σ̂ (χ̂) = N3
. The tail represents the
most extreme 4% of the return values during a time interval from July
1985 to April 2008. ’tail’ shows the calculation interval of L with c = 29
and k = 229, and ∗ denotes χ̂ 6= 1 and therefore χ̂ = 0. . . . . . . . . . 18
3.3 Establishing the uncertainty of non-parametrically estimated upper and
lower tail dependence coefficients χ̂ by creating 1000 bootstrap samples
of historical return data tables for S&P 500 index and corresponding
asset returns and calculation of quantiles, extreme values and standard
deviations of the results. The tails represent the most extreme 4% (ex-
cluding highest 0.5% for χc ) of the return values during a time interval
lower tail dependence coefficients χ̂ by creating 1000 bootstrap samples
cluding highest 0.5% for χc ) of the return values during a time interval
from July 1985 to April 2008. . . . . . . . . . . . . . . . . . . . . . . . 20
3.5 Comparison of tail index estimators ν̂ (Hill’s estimator) and b̂γn (estima-
tor by Gabaix) for positive and negative tails of the S&P 500 index, 9
included assets, and the residues ε obtained by regressing each asset on
the S&P 500 index, during the time intervals ranging from January 1991
to December 2000 with a 4% quantile of k = 100 values and from July
1985 to April 2008 with a 4% quantile of k = 229 values. Values with ∗
represent tail indexes, which can’t be considered equal to the respective
S&P 500 index at the 95% condfidence level. . . . . . . . . . . . . . . . 28
XI
3.6 Establishing the uncertainty of estimated upper and lower tail indexes
ν̂ by creating bs = 1000 bootstrap samples of historical return data for
S&P 500 and included assets and calculation of bootstrap mean value
νmean with rel. error from the original value, deviation quantiles and
standard deviation from νmean , and most extreme deviation value. The
tail represents the most extreme 4 % of the return values during a time
interval ranging from January 1991 to December 2000 (k = 100 values)
and from July 1985 to April 2008 (k = 229 values). . . . . . . . . . . . 29
3.7 Establishing the uncertainty of estimated upper and lower tail indexes b̂γn
by creating bootstrap samples (bs) of historical return data for S&P 500
and included assets and calculation of bootstrap mean value νmean with
rel. error from the original value, deviation quantiles and standard devi-
ation from bγmean , and most extreme deviation value. The tail represents
the most extreme 4 % of the return values during a time interval ranging
from January 1991 to December 2000 (k = 100 values, bs = 1000) and
from July 1985 to April 2008 (k = 229 values, bs = 650). . . . . . . . . 30
with a set of nine major assets traded on the New York stockn Exchange oν
+,− l
calculated by a non-parametric approach: λ̂ = 1/ max 1, β on

the left and by a parametric approach: λ̂+,− = 1/ 1 + β −ν · CCYε on
the right. The tail represents the most extreme 4% of the return values
during a time interval from January 1991 to December 2000. ’tail’ shows
the calculation interval of l with c = 13 and k = 100 and ∗ denotes
negative β̂. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
n obγn
calculated by a non-parametric approach: λ̂+,− = 1/ max 1, βl on
γ

the left and by a parametric approach: λ̂+,− = 1/ 1 + β −bn · CCYε on
during a time interval from January 1991 to December 2000. ’tail’ shows
the calculation interval of l with c = 13 and k = 100 and ∗ denotes
negative β̂. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
with a set of nine major assets traded on the New York stockn Exchange oν

the left and by a parametric approach: λ̂+,− = 1/ 1 + β −ν · CCYε on
during a time interval from July 1985 to April 2008. ’tail’ shows the
calculation interval of l with c = 29 and k = 229. . . . . . . . . . . . . 35
n obγn
γ

the left and by a parametric approach: λ̂+,− = 1/ 1 + β̂ −bn · CCYε on
during a time interval from July 1985 to April 2008. ’tail’ shows the
calculation interval of l with c = 29 and k = 229. . . . . . . . . . . . . 36
lower tail dependence coefficients λ̂ by creating 1000 bootstrap samples
cluding highest 0.5% for λc ) of the return values during a time interval
from January 1991 to December 2000. β̂j have been calculated on the
whole samples.∗ denotes negative β̂ and therefore λ̂ = 0 and ’Inf’ denotes
·/0. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
from July 1985 to April 2008. β̂j have been calculated on the whole
samples. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
3.14 ARCH statistics applied to daily S&P 500 index return data for an in-
terval ranging from January 1950 to April 2008 and for lags of q = 10,
15, and 20 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
3.15 Establishing the uncertainty of parametrically estimated upper and lower
tail dependence coefficients λ̂ by creating 1000 bootstrap samples of his-
torical return data tables for S&P 500 index and corresponding asset
returns and calculation of quantiles, extreme values, and standard devi-
ations of the results. The tails represent the most extreme 4% (exclud-
ing highest 0.5% for λc ) of the return values during a time interval from
January 1991 to December 2000. β̂j have been calculated on the whole
samples.∗ denotes negative β̂ and therefore λ̂ = 0 and ’Inf’ denotes ·/0. 69
3.16 Establishing the uncertainty of of parametrically estimated upper and
asset returns and calculation of quantiles, extreme values, and standard
from July 1985 to April 2008. β̂j have been calculated on the whole
samples. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70
3.17 Relative deviations between coefficients of upper and lower tail depen-
dence estimated by the non-parametric approach of Sornette & Malev-
ergne using β̂ calculated for the whole sample and β̂SI calculated for the
tail according to three different conditions for index S&P 500 and the
nine assets. The tail represents the most extreme 4 % of data during
a smaller time interval ranging from January 1991 to December 2000
(k = 100) and during a bigger time interval ranging from July 1985 to
Mars 2008 (k = 229). * denotes zero values of tail dependence calculated
by β̂SI , ’NaN’ denotes 0/0, and ’inf’ denotes ·/0. . . . . . . . . . . . . . 76
3.18 Results for β̂SI using the first SI condition: Y ≥ Y (k) ∩ X ≥ X(k) and
the second SI condition: Y ≥ Y (k) for upper and lower tails calculated
by least squares method applied on linear additive single factor model:
X = β · Y + ε and for resulting upper and lower tail dependence coef-
ficients λˆ+ and λˆ− with corrected ˆl (c . . . k) and uncorrected ˆl (1 . . . k).
The tail represents the most extreme 4% of data during a time interval
ranging from January 1991 to December 2000 (k = 100, c = 13). *
denotes β̂ < 0 → λ = 0. . . . . . . . . . . . . . . . . . . . . . . . . . . . 77
3.19 Results for β̂SI using the first SI condition: Y ≥ Y (k) ∩ X ≥ X(k) and
the second SI condition: Y ≥ Y (k) for upper and lower tails calculated
by least squares method applied on linear additive single factor model:
X = β · Y + ε and for resulting upper and lower tail dependence coef-
ficients λˆ+ and λˆ− with corrected ˆl (c . . . k) and uncorrected ˆl (1 . . . k).
The tail represents the most extreme 4% of data during a time interval
ranging from July 1985 to Mars 2008 (k = 229, c = 29). * denotes
β̂ < 0 → λ = 0. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78
first SI condition: Y ≥ Y (k) ∩ X ≥ X(k). ’inf’ denotes ·/0. . . . . . . . 95
from July 1985 to Mars 2008. β̂j have been calculated on the first SI
condition: Y ≥ Y (k) ∩ X ≥ X(k). ’inf’ denotes ·/0. . . . . . . . . . . . 96
second SI condition: Y ≥ Y (k). ’inf’ denotes ·/0. . . . . . . . . . . . . 97
from July 1985 to Mars 2008. β̂j have been calculated on the second SI
condition: Y ≥ Y (k). ’inf’ denotes ·/0. . . . . . . . . . . . . . . . . . . 98
3.24 Estimated values of upper and lower tail dependence for index S&P
500 and a set of nine major assets traded on the New York stock Ex-
change calculated by non-parametric approaches according to Schmidt
& Stadtmüller. The tail represents the most extreme 4% of the return
values during a time interval from January 1991 to December 2000 with
a threshold value of k = 0.04·m = 100.3. Columns denoted by ’w. noise’
correspond to columns on their right and are performed by the same ap-
proaches but with a small random noise of amplitude (10−6 ) added to
the returns that no two returns are equal anymore. . . . . . . . . . . . 107
3.25 Estimated values of upper and lower tail dependence for index S&P
500 and a set of nine major assets traded on the New York stock Ex-
change calculated by non-parametric approaches according to Schmidt &
Stadtmüller. The tail represents the most extreme 4% of the return val-
ues during a time interval from July 1985 to April 2008 with a threshold
value of k = 0.04 · m = 229.4. Columns denoted by ’w. noise’ correspond
to columns on their right and are performed by the same approaches but
with a small random noise of amplitude (10−6 ) added to the returns that
no two returns are equal anymore. . . . . . . . . . . . . . . . . . . . . . 108
3.26 Establishing the uncertainty of non-parametrically estimated upper tail
dependence coefficients λ̂U,m and λ̂EV T
U,m and lower tail dependence coef-
ficients λ̂L,m and λ̂EV T
L,m by creating 1000 bootstrap samples of historical
return data tables for S&P 500 index and corresponding asset returns
and calculation of quantiles, extreme values, and standard deviations of
the results. The tails represent the most extreme 4% of the return values
during a time interval from January 1991 to December 2000. . . . . . . 116
3.27 Establishing the uncertainty of non-parametrically estimated upper tail
dependence coefficients λ̂U,m and λ̂EV T
U,m and lower tail dependence coef-
ficients λ̂L,m and λ̂EV T
L,m by creating 800 bootstrap samples of historical
return data tables for S&P 500 index and corresponding asset returns
and calculation of quantiles, extreme values, and standard deviations of
the results. The tails represent the most extreme 4% of the return values
during a time interval from July 1985 to April 2008. . . . . . . . . . . . 117
4.1 Indexes that were used for the implementation of the different concepts
given by their name, further used abbreviation, and country of origin. . 130
4.2 Assets included in indexes ’AORD’ (ASX), ’CAC 40’, and ’DAX’ that
were used for the implementation of the different concepts given by their
name, further used abbreviation, and country of origin. . . . . . . . . . 131
4.3 Assets included in indexes ’DOW’ (Dow Jones), ’FTSE 100’, and ’JKSE’
that were used for the implementation of the different concepts given by
their name, further used abbreviation, and country of origin. . . . . . . 132
4.4 Assets included in indexes ’MERVAL’, ’MIBTEL’, ’NASDAQ’, and ’SMI’
that were used for the implementation of the different concepts given by
their name, further used abbreviation, and country of origin. . . . . . . 133
4.5 Assets included in indexes ’S&P 500’, ’SSEC’, and ’TA 100’ that were
used for the implementation of the different concepts given by their name,
further used abbreviation, and country of origin. Additional assets in-
cluded in index S&P 500 that were not part of the reference samples
presented in chapter (3) are listed below ’new assets’. . . . . . . . . . . 134
4.6 Estimated upper and lower tail dependence λ̂+,− applying the non-parametric
and parametric approaches according to Sornette & Malevergne to in-
dex S&P 500 and 16 assets included in dependence of their component
weights in the index denoted by ’C.W.’ and β. The data samples con-
tain N = 2000 daily price observations on a range from 12.04.2000 to
31.03.2008. Tail index ν̂ was calculated using Hill’s estimator, k =
0.04 · N = 80, c = 0.005 · N = 10, and ∗ denotes negative β̂. . . . . . . 135
approach according to Sornette & Malevergne to index S&P 500 and 16
assets included using βSI only calculated for the extreme tails by first
and second β-smile conditions. Component weights of assets within the
index are denoted by ’C.W.’, βSI for the first and second conditions and
β calculated for all data are listed to observe their impact on the esti-
mates. The data samples contain N = 2000 daily price observations on a
time interval from 12.04.2000 to 31.03.2008. Tail index ν̂ was calculated
using Hill’s estimator. ’Cond 1’ denotes: Y ≥ Y (k) ∩ X ≥ X(k), ’Cond.
2’ denotes Y ≥ Y (k), k = 0.04 · N = 80, c = 0.005 · N = 10, and ∗
denotes negative β̂. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 136
4.8 Estimated upper and lower tail dependence λ̂+,− applying the parametric
and the non-parametric approach according to Sornette & Malevergne
to index Dow Jones Industrial Average and 12 assets included using β
calculated by all data. Component weights of assets within the index
are denoted by ’C.W.’, and β calculated for all data are listed to observe
their impact on the estimates. The data samples contain N = 2000 daily
price observations on a time interval from 16.08.2000 to 31.07.2008. Tail
index ν̂ was calculated using Hill’s estimator, k = 0.04 · N = 80, and
c = 0.005 · N = 10. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 137
approach according to Sornette & Malevergne to index Dow Jones In-
dustrial Average and 12 assets included using βSI only calculated for
the extreme tails by first and second β-smile conditions. Component
weights of assets within the index denoted by ’C.W.’, βSI for the first
and second conditions and β calculated for all data are listed to observe
their impact on the estimates. The data samples contain N = 2000 daily
price observations on a time interval from 16.08.2000 to 31.07.2008. Tail
index ν̂ was calculated using Hill’s estimator, k = 0.04 · N = 80, and
c = 0.005 · N = 10. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 138
4.10 Estimated upper and lower tail dependence λ̂+,− applying the parametric
and the non-parametric approach according to Sornette & Malevergne to
index NASDAQ Composite and 9 assets included using β calculated for
all data and βSI only calculated for the extreme tails by first and second
β-smile conditions. Component weights of assets within the index de-
noted by ’C.W.’, βSI for the first and second conditions and β calculated
for all data are listed to observe their impact on the estimates. The data
samples contain N = 2000 daily price observations on a time interval
from 15.08.2000 to 31.07.2008. Tail index ν̂ was calculated using Hill’s
estimator, k = 0.04 · N = 80, c = 0.005 · N = 10, and ∗ denotes negative β̂.139
4.11 Estimated upper and lower tail dependence according to Poon, Rockinger,
and Tawn (χ̂+ −
· , χ̂· ) in the upper part and according to Schmidt &
Stadtmüller in the lower part (λ̂·,m, λ̂EV T
·,m ) for index AORD (ASX) and
14 assets included including error bars estimated by bootstrap sampling
with replacement for bs = 1000 bootstrap samples shown next to the
estimates. The data samples contain N = 1398 daily price observations
on a time interval from begin of February 2003 to end of August 2008. 140
4.12 Estimated λ̂+,− applying the non-parametric approach according to Sor-
nette & Malevergne to index AORD (ASX) and 14 assets included using
βSI only calculated for the extreme tails by first and second β-smile con-
ditions. Error bars estimated by bootstrap sampling with replacement
for bs = 1000 bootstrap samples were large and therefore mostly denoted
by *. The data samples contain N = 1398 data points from February
2003 to end of August 2008. Tail index ν̂ was calculated using Hill’s
estimator. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 141
4.13 Further used abbreviations of currency exchange rates that were used
for the estimation of tail dependence. . . . . . . . . . . . . . . . . . . . 142
4.14 Estimated λ̂+,− applying the non-parametric approachn oν according to Sor-
+,− l
nette & Malevergne given by: λ̂ = 1/ max 1, β to exchange rates
of various foreign currencies with the US$. The tail represents the most
extreme 4% of the return values during a time interval ranging from
20.10.2002 to 10.04.2008 consisting of N = 2000 daily observations. ’c’
means that tails were corrected for 0.5% of most extreme data for the
estimation of l. Tail index ν̂ was calculated using Hill’s estimator. . . . 144
4.15 Estimated χ̂+,− applying the non-parametric approach according to Poon,
Z ·k
Rockinger, and Tawn given by: χ̂+,− = k,N N
to exchange rates of various
foreign currencies with the US$. The tail represents the most extreme
4% of the return values during a time interval ranging from 20.10.2002
to 10.04.2008 consisting of N = 2000 daily observations. ’c’ means that
tails were corrected for 0.5% of most extreme data for the estimation of
L. Tail indexes ν̂ were calculated using Hill’s estimator. . . . . . . . . . 145
4.16 Estimated λ̂L,m , λ̂U,m , λ̂EV T EV T
L,m , and λ̂U,m applying the non-parametric
approaches according to Schmidt & Stadtmüller explained in section
(3.4) to exchange rates of various foreign currencies with the US$. The
tail represents the most extreme 4% of the return values during a time
interval ranging from 20.10.2002 to 10.04.2008 consisting of N = 2000
daily observations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 146
4.17 Establishing bias and error bars of β̂ calculated by all data and effect on
λ̂+,− estimated by applying the non-parametric approach according to
Sornette & Malevergne to 1000 synthetic samples consisting of N = 2507
data points. The bias is calculated by comparing mean values β̂ all data
+,−
and λ̂ (β̂all data ) to original values denoted by βorig and corresponding
tail dependence estimator λ̂+,− (βorig ) and for the estimation of error bars
standard deviation ’std’ and 95% quantiles of the estimates are provided.
+,−
Relative bias (’rel.bias’) is calculated as percentage of λ̂ (βorig ). Tail
indexes α were set equal to three to avoid a second source of error and
’inf’ means ·/0. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 150
4.18 Establishing bias and error
bars of β̂SI 2 calculated by second β-smile
condition: Y ≥ Y (k) and effect on λ̂+,− estimated by applying the
non-parametric approach according to Sornette & Malevergne to 1000
synthetic samples consisting of N = 2507 data points. The bias is cal-
+,−
culated by comparing mean values β̂ all data and λ̂ (β̂all data ) to origi-
nal values denoted by βorig and corresponding tail dependence estimator
λ̂+,− (βorig ) and for the estimation of error bars standard deviation ’std’
and 95% quantiles of the estimates are provided. Tail indexes α were set
equal to three to avoid a second source of error and ∗ means that relative
+,−
bias (’rel.bias’) calculated as percentage of λ̂ (βorig ) ≥ 100%. . . . . . 151
4.19 Establishing bias and error bars of ν̂ and b̂γn , estimated for 1000 synthetic
samples consisting of N = 2507 data points. The bias is calculated by
γ
comparing mean values ν̂ and b̂n to original values denoted by α and for
the estimation of error bars standard deviation ’std’ and 95% quantiles
of the estimates are provided. Relative bias (’rel.bias’) is calculated as
percentage of α. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 152
4.20 Establishing bias and error bars of λ̂+,− (ν̂, β̂all data ) with β̂ calculated by
+,−
all data
and λ̂ (ν̂, β̂SI 2 ) with β̂ calculated by second β-smile condi-
tion: Y ≥ Y (k) by applying the non-parametric approach accord-
ing to Sornette & Malevergne to 1000 synthetic samples consisting of
N = 2507 data points. The bias is calculated by comparing mean
+,− +,−
values λ̂ (ν̂, β̂all data ) and λ̂ (ν̂, β̂SI 2 ) to original values denoted by
+,−
λ̂ (α, βorig ) and for the estimation of error bars standard deviation
’std’ and 95% quantiles of the estimates are provided. ∗ means that
+,−
relative bias (’rel.bias’) calculated as percentage of λ̂ (βorig ) ≥ 100%. 153
EV T
4.21 Comparison of estimates by non-parametric estimators λ̂·,m , λ̂·,m ac-
+,−
cording to Schmidt & Stadtmüller, and χ̂ according to Poon, Rockinger,
+,−
and Tawn with λ̂ (βall data ) according to Sornette & Malevergne by
applying the different concepts to 1000 synthetic samples consisting of
N = 2507 data points created by different βorig . For the estimation of
error bars standard deviation ’std’ and 95% quantiles of the estimates
+,−
are calculated and for χ̂ the proposed standard deviation σ̂ is given
for comparison. Tail indexes α were estimated by the Hill estimator. . . 155
5.1 Descriptive statistics of historical return series of S&P 500 and nine
assets included during a time interval from January 1991 to December
2000 (smaller reference sample of chapter (3)) . . . . . . . . . . . . . . 171
5.2 Descriptive statistics of historical return series of S&P 500 and nine as-
sets included during a time interval from July 1985 to April 2008 (bigger
reference sample of chapter (3)) . . . . . . . . . . . . . . . . . . . . . . 171
5.3 Descriptive statistics of historical return series of S&P 500 and nine as-
sets included during a time interval from 12.04.2000 to 31.03.2008 (sam-
ple consisting of N = 2000 observations used in chapter (4)) . . . . . . 172
5.4 Descriptive statistics of historical return series of Dow Jones Industrial
Average and 12 assets included during a time interval from 16.08.2000 to
31.07.2008 (sample consisting of N = 2000 observations used in chapter
(4)) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 172
5.5 Descriptive statistics of historical return series of NASDAQ Composite
and 9 assets included during a time interval from 15.08.2000 to 31.07.2008
(sample consisting of N = 2000 observations used in chapter (4)) . . . 173
5.6 Descriptive statistics of historical return series of AORD (ASX) and
14 assets included during a time interval from February 2003 to end
of August 2008 (sample consisting of N = 1398 observations used in
chapter (4)) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 173
5.7 Descriptive statistics of historical currency exchange rate series during a
time interval from 19.10.2002 to 10.04.2008 (sample consisting of N =
2000 observations used in chapter (4)) . . . . . . . . . . . . . . . . . . 174
5.8 Descriptive statistics of 6 exemplary synthetic samples (sample consist-
ing of N = 2507 observations used in chapter (4)) . . . . . . . . . . . . 174
Chapter 1
Introduction
1.1 Motivation
The importance of extreme events has become a major issue in financial risk manage-
ment. Established risk measures like Pearson’s product moment correlation coefficient
and Spearman’s rank order correlation coefficient are controlled by small movements
around the mean and therefor fail to describe dependence between extreme events. Fac-
ing asset selection and allocation with respect to portfolio management extreme events
are primarily represented by jump risks and default risks.
Extreme events appear in the tails of return distributions of assets and because of the
fact that asset return distributions are heavy tailed, extraordinary downside losses are
more likely to happen than expected assuming Gaussian distributions. During market
crashes or recessions, standard portfolio management and optimization strategies may
break down. Recent events show that impact and frequency of stock market crashes
have increased during the last two decades. Our target is to diversify away extreme
risks by minimizing extreme dependence between assets within a portfolio. Therefore we
focus on the concept of tail dependence, which was first introduced by Sibuya [1] (1960).
The coefficient of tail dependence between two assets is defined as the probability that
one of the two assets undergoes a large loss (or gain) assuming that the other asset also
undergoes a large loss (or gain).
Several approaches were developed for the estimation of the tail dependence coeffi-
cient. It is the purpose of this work to review and implement the most recent concepts
for the estimation of tail dependence and to study their relevance for financial risk
management as well as assets selection and allocation by applying them to a broad-
base index such as the S&P 500 representing the market and an arbitrary asset that is
included in the index, to measure extreme dependence between the two. Using histor-
ical time series and synthetic time series, we will provide an in-depth analysis of the
different concepts. The results of this thesis should provide the investor with a tool
that can directly be applied to real financial data and help ancillary to other criteria to
decide about addition or removal of assets in their portfolios for the purpose of mini-
mizing extreme dependence. It is important to add that a special effort has been made
in writing down and presenting the results in a way that allows a non-expert reader to
use this methods. Programs in the form of Matlab m-files are enclosed to the appendix
as well as the attached data CD and throughout the whole work cross-references to the
respective codes are provided to facilitate traceability and encourage application of the
concepts.
2
1.2 Thesis Outline
The study of extreme co-movements requires the conjunction of the multivariate ex-
treme value theory and the notion of copulas. In chapter (2) an introduction to fun-
damental concepts used within this work is provided.
Chapter (3) is dedicated to the different concepts for the estimation of the coefficient
of tail dependence.
Starting in section (3.1) with concepts developed by Poon, Rockinger, and Tawn and
published in [13] (2004) we will first provide an insight in their most important theoret-
ical findings, then give a detailed description how their approaches were implemented,
and finally analyze the results applying the methods to a bigger and a smaller reference
data set of the index S&P 500 and nine major assets included in the index and addi-
tionally provide an estimation of error bars by bootstrap sampling with replacement.
We will use these two reference data sets throughout the whole chapter.
In section (3.2) we will come to the main topic of this thesis consisting of concepts
according to Sornette & Malevergne presented in [21] (2006), [20] (2004), [19] (2002).
We will also start with a subsection about the theoretical background and then con-
tinue with implementation and analysis of the different approaches including error bar
estimations by bootstrap sampling with replacement. In subsection (3.3), we will ex-
pand the concepts by a so-called β-smile improvement condition. Here, we allude to
the literature on the ’β-smile’ using a terminology borrowed from the volatility-smile1
in financial option theory pointing at the fact that parameter β may exhibit a change
as a function of the quantiles on which it is estimated. For the non-parametric ap-
proach and the non-parametric approach including β-smile improvement we performed
a rolling time window observation to analyze time dynamics and consistency over time
of the estimators.
Our last concept according to Schmidt & Stadtmüller was introduced in [24] (2005)
and is presented in section (3.4). After presenting the theoretical background and
details concerning the implementation of the concepts, we also provide an analysis of
coefficients performed on the reference data sets and error bar estimations by bootstrap
sampling with replacement. Finally, there is also a rolling time window observation per-
formed. In section (3.5) we will compare the results yielded by the different methods
and summarize the findings of the whole chapter.
Chapter (4) shows the application of the different concepts to various data and
purposes. Starting with the application of the concepts to major financial centers in the
world in section (4.1) shows us interesting new insights into the methods and broadens
our horizon on a global scale. On the other hand, it also reveals some weaknesses of
our approaches.
Section (4.2) provides us with applications of the concepts to a very different purpose:
we use the tail dependence coefficients to estimate extreme dependences of international
currency exchange rates.
In section (4.3) the composition of a synthetic time series is presented in order to check
our methods for bias and lower error bounds. Finally, some concluding remarks are
provided in chapter (5).
1
Pattern showing that at-the-money options tend to have lower implied volatilities than other options
3
Chapter 2
Important Concepts used in

Multivariate Extreme Value Theory
Extreme value theory (EVT) is a branch of statistics, which addresses extreme events.
These are high impact events that happen with very low probability i.e. earthquakes or
100 year flood etc. Extreme measures provide estimates for extreme but unlikely events,
whereas classic general measures tend to focus on the whole empirical distribution and
therefore often neglect low-probability events. Nevertheless, it is known that extreme
events account for a large fraction in terms of effect.
In the financial sector market crashes are extreme realizations of the respective return
distribution. The traditional measure to assess the risk of an asset is the variance of
its returns, introduced by Markowitz [2] (1952). But this measure assumes that the
probability density function (pdf) is of Gaussian nature. Empirical data show that
there is a ’fatness’ in the tails of pdf functions of returns. That means that extreme
events occur more often than assumed by Gaussian approximations.
Anyway, the determination of the precise shape of the tail of the distribution of
returns has proven to be a challenging task. In order to assess risk of high probabil-
ity levels of above 95 %, parametric and non-parametric estimations are established:
Parametrization in our context means fitting the parameters of a general model to our
return data to achieve a good approximation. That becomes necessary when risk at
very high probability levels is estimated and non-parametric estimates fail because of
lack of data, which is often the case facing daily return data as we will see later on.
As mentioned in the title we are concerned with ’multivariate’ EVT. In contrast to
univariate distributions, multivariate distributions of returns denote joint probabilities
of realizations of multiple asset return series. This comprises both, risk explained by an
asset’s univariate marginal distribution and risk due to dependence on other assets. To
offer to the interested reader a very complete insight into univariate EVT and also on
the very active and dynamical field of multivariate EVT we refer to [3] (2007) and [4]
(2006) and references therein.
Now we want to introduce some fundamental concepts of multivariate EVT to pro-
vide a wide overview of the field. The explanations will be based on [3] (2007), which
provides a concise and recent overview of Extreme Value analysis.
4
2.1 Multivariate Extreme Value Distributions
In multivariate Extreme Value Analysis it is a standard practice to investigate vectors
of component wise maxima or minima. Letting {(Xi,1 , . . . , Xi,d )} for i = 1, . . . , n be
independent and identically distributed (iid) random variables with distribution F the
corresponding row-vector of component wise maxima Mn is given by:

Mn = (Mn,1 , . . . , Mn,d ) = max {Xi,1 } , . . . , max {Xi,d } (2.1)
1≤i≤n 1≤i≤n
fn is given by:
and the corresponding row-vector of component wise minima M

fn = (M
M fn,1 , . . . , M
fn,d ) = min {Xi,1 } , . . . , min {Xi,d } (2.2)
1≤i≤n 1≤i≤n
It is important to notice that the maximum or minimum of each of the different random
variables may occur for different indexes i∗1 , . . . , i∗d , where ∗ denotes the maximum or
minimum. Therefore Mn and M fn do not necessarily correspond to observed values
in the original series and the analysis of component wise maxima or minima may
sometimes be of little use.
A standard way to operate is to look for the existence of sequences of constants an,i
and bn,i > 1 for 1 ≤ i ≤ d such that for all (x1 , . . . , xd ) ∈ Rd the function:

Mn,1 − an,1 Mn,d − an,d
G (x1 , . . . , xd ) = lim Pr ≤ x1 , . . . , ≤ xd
n→∞ bn,1 bn,d
= F n (an,1 + bn,1 · x1 , . . . , an,d + bn,d · xd ) (2.3)
is a proper distribution function with non-degenerate marginals. For minima the fol-
lowing function holds:
( )
fn,1 − ãn,1
M fn,d − ãn,d
M
G (x1 , . . . , xd ) = lim Pr ≥ x1 , . . . , ≥ xd
n→∞ b̃n,1 b̃n,d
n

= F ãn,1 + b̃n,1 · x1 , . . . , ãn,d + b̃n,d · xd , (2.4)
where G and F denote the survival functions associated with G and F defined below.
For maxima the distribution F is said to belong to the Maximum Domain of Attraction
(MDA) of the Multivariate Extreme Value (MEV) distribution G if there exist sequences
of constants an,i and bn,i > 1 for 1 ≤ i ≤ d such that equation (2.3) is satisfied.
A similar definition can be given for minima. The following equations hold for all
(x1 , . . . , xd ) ∈ Rd such that G(x) > 0 and G(x) > 0:
lim n[1 − F (an,1 + bn,1 · x1 , . . . , an,d + bn,d · xd )] = − log G (x1 , . . . , xd ) (2.5)

n→∞
lim n[1 − F (ãn,1 + b̃n,1 · x1 , . . . , ãn,d + b̃n,d · xd )] = − log G (x1 , . . . , xd ) (2.6)

n→∞
From now on we only concentrate on the study of maxima because as we are using
return series later on with mean around zero we can handle both in the same way by
multiplying minima with factor (−1).
5
Setting all the xi ’s but one to +∞ in equation (2.3) yields:
lim Fin (an,i + bn,i · xi ) = Gi (xi ) , for i = 1, . . . , d, (2.7)
n→∞
where Fi and Gi are the i-th marginals of F and G. In turn Fi ∈ MDA (Gi ), where Gi
is a Gumbel, Fréchet, or Weibull distribution 1 .
In order to isolate the dependence features from the marginal distribution aspects [6]
(2000), traditionally the components of both the distribution F and the corresponding
MEV distribution G are transformed to standard marginals. It is customary to choose
the standard Fréchet distribution as marginals i.e. the function φ : R → [0, 1] given
−1
by φ(x) = exp x for x > 0 and zero elsewhere and by its inverse function: y =
φ−1 (x) = −1/ log(x), where ’log’ denotes the natural logarithm. Defining X as a
d-variate random row-vector with distribution F and continuous marginals
1
Y = φ−1 (F (X)) = − , (2.8)
log F (X)
i.e. Yi = φ−1 (Fi (Xi )) = −1/ log F (Xi ) for all i ≤ 1 ≤ d. By the Probability In-
tegral Transform it follows that Y has standard Fréchet marginals. Letting G be a
multivariate distribution with continuous marginals Gi ’s and defining:
(−1) (−1) !
−1 −1
G∗ (y1 , . . . , yd ) = G · yi , . . . , · yd , (2.9)
log G1 log Gd
with y1 > 0, . . . , yd > 0, then G∗ has standard Fréchet marginals, and G is a MEV dis-
tribution only if G∗ is also MEV distributed. Thus the marginals of a MEV distribution
can be standardized, yet preserving the extreme value properties.
2.2 The Survival Function

The survival function F associated with multivariate extreme value theory is given by:
F = Pr {X1 > x1 , . . . , Xd > xd } (2.10)
In the univariate case d = 1 F = 1 − F (x). Unfortunately this does not hold generally
in multivariate EVT [5] (1988).
2.3 Multivariate Dependence

In the multivariate case the notions of dependence becomes numerous and complex.
Below we introduce some basic concepts. For further information about how to measure
dependence between random variables we refer to [7] (2006), [8] (2001), and [9] (1997).
2.3.1 Positive Orthant Dependence

Assuming that X = (X1 , . . . , Xd ) is a d-variate random row-vector, X is positively
lower orthant dependent (PLOD), if for all x = (x1 , . . . , xd ) ∈ Rd ,
d
Y
Pr {X ≤ x} ≥ Pr {Xi ≤ xi } (2.11)
i=1
1
This is shown in Theorem 1.7 of chapter 1.2 of [3] (2007)
6
and X is positively upper orthant dependent (PUOD) if for all x = (x1 , . . . , xd ) ∈ Rd ,
d
Y
Pr {X > x} ≥ Pr {Xi > xi } (2.12)
i=1
Generally X is positively orthant dependent if for all x = (x1 , . . . , xd ) ∈ Rd both

equations (2.11) and (2.12) hold. The definition of negative lower orthant dependence
(NLOD), negative upper orthant dependence (NUOD), and generally negative orthant
dependence (NOD) can be introduced by reversing the sense of the inequalities.
If X has joint distribution F with marginals Fi for i = 1, . . . , d then equation (2.11)
is equivalent to:
F (x1 , . . . , xd ) ≥ F1 (x1 ) · · · Fd (xd ) (2.13)
for all x ∈ Rd and equation (2.12) is equivalent to:
F (x1 , . . . , xd ) ≥ F 1 (x1 ) · · · F d (xd ) (2.14)
for all x ∈ Rd .
2.3.2 Quadrant Dependence

Quadrant dependence given by positive quadrant dependence (PQD) and negative
quadrant dependence (NQD) is a bivariate concept of dependence and for d = 2 the
definitions of PUOD and PLOD are equivalent to PQD. Let X and Y be a pair of
continuous random variables with joint distribution function FX,Y and marginals FX
and FY . X and Y are positively quadrant dependent (PQD) if:
∀(x, y) ∈ R2 FX,Y ≥ FX (x) · FY (y) (2.15)
and negatively quadrant dependent (NQD) if:
∀(x, y) ∈ R2 FX,Y ≤ FX (x) · FY (y), (2.16)

whereas the quadrant dependence properties are invariant under strictly increasing
transformations. Two random variables X and Y are PQD if Cov (f (X), g(Y )) for
all increasing functions f and g for which the expectations E (f (x)), E (g(y)), and
E (f (x) · g(y)) exist 2 .
2.3.3 Associated Variables

The random variables X1 , . . . , Xd are said to be (positively) associated if, for every pair
of a, b of non-decreasing real-valued functions defined on Rd ,
Cov (a (X1 , . . . , Xd ) , b (X1 , . . . , Xd )) ≥ 0 (2.17)
2
Cov denotes the covariance, which provides a measure of the strength of the correlation between two or
more random variables and is given by: Cov(X, Y ) = E (X · Y ) − E (X) · E (Y ) assuming that X and Y are
random variables on R
7
whenever the relevant expectations exist [10] (1983). If the random variables X1 , . . . , Xd
have a MEV distributions, then they are associated.
A MEV distribution G satisfies the condition:
d
Y
G (x1 , . . . , xd ) ≥ Gi (xi ) (2.18)
i=1
for all x ∈ Rd . The forms of limiting multivariate distributions correspond to the cases
of (asymptotic) total independence:
d
Y
G (x1 , . . . , xd ) = Gi (xi ) (2.19)
i=1
and (asymptotic) total dependence:
G (x1 , . . . , xd ) = min {G1 (x1 ) , . . . , Gd (xd )} (2.20)

between the component wise maxima for all x ∈ Rd . For further details concerning
asymptotic total dependence and asymptotic total independence we refer to [6] (2000)
and [10] (1983).
Pairwise independent random variables having a joint MEV distribution are mutu-
ally independent. Thus the study of asymptotic independence can be confined to the
bivariate case.
Asymptotic total independence arises only if equation (2.7) holds, and there exists
x ∈ Rd such that 0 < Gi (xi ) < 1 for i = 1, . . . , d and
n→∞
F n (an,1 + bn,1 · x1 , . . . , an,d + bn,d · xd ) −→ G1 (x1 ) · · · Gd (xd ) (2.21)
Moreover equation (2.19) only holds for any x ∈ Rd if
G(0, . . . , 0) = G1 (0), · · · Gd (0) = exp(−d) (2.22)
provided that Gi are standard Gumbel distributions or
G(1, . . . , 1) = G1 (1), · · · Gd (1) = exp(−d) (2.23)
provided that Gi are Fréchet distributions or
G(−1, . . . , −1) = G1 (−1), · · · Gd (−1) = exp(−d) (2.24)

(2.25)
provided that Gi are Weibull distributions 3 (2007).
Similar conditions hold for the case of asymptotic total dependence. Asymptotic
dependence arises only if equation (2.7) holds, and there exists x ∈ Rd such that
0 < G1 (x1 ) = · · · = Gd (xd ) < 1 and
n→∞
F n (an,1 + bn,1 · x1 , . . . , an,d + bn,d · xd ) −→ G1 (x1 ) (2.26)
3
The distinction between these three types of distributions belongs to the field of univariate extreme value
Theory and is explained in i.e. Theorem 1.7 of chapter 1.2 of [3]
8
We refer to Appendix B of [3] (2007) for a detailed handling of dependence between
random variables. Now we come to notions of multivariate extreme value theory that
are fundamental for the comprehension of the concepts that are discussed in chapter
(3).
2.4 Copulas
Facing financial risk management, the diversification of risks between two or more assets
is the major issue. To achieve diversification, it is fundamental to have notice of an
accurate description of the dependence between different assets. Copulas introduced by
Sklar [11] (1959) describe the general dependence structure of several random variables.
For all further definitions I will focus on the bivariate case only.
2.4.1 Copula and Survival Copula

A bivariate distribution function FX,Y of two random variables X and Y with marginal
distributions Fx (·) and Fy (·) can be written in the form:
FX,Y (x, y) = Pr(X ≤ x, Y ≤ y)

= C(Fx (x), Fy (y)), (2.27)
where C(·, ·) with range in [0, 1] × [0, 1] is the copula of the two random variables X
and Y , and is unique if the random variables have continuous marginal distributions.
Moreover, the copula is invariant under strictly increasing transformation of the vari-
ables and is therefore an intrinsic or scale invariant measure of dependence. Denoting
the joint survival function Pr(X > x, Y > y) by F X,Y (x, y) we may write:
F X,Y (x, y) = 1 − FX (x) − FY (y) + FX,Y (x, y)

= C{Fx (x), Fy (y)}, (2.28)
where C(·, ·) with range in [0, 1]×[0, 1] is the survival copula of the two random variables
X and Y .
2.4.2 Empirical Copula

If the bivariate distribution function FX,Y of two random variables X and Y and their
respective marginal distributions Fx (·) and Fy (·) are not known we can calculate the
empirical copula by counting of the number of pairs that satisfy given constraints.
Let {(Rk , Sk )} be the ranks of the random sample {(Xk , Yk )}, then the corresponding
empirical copula is defined as:
n
1X Rk Sk
Cn (Fx (x) = u, Fy (y) = v) = I ≤ u and ≤v , (2.29)
n k=1 n+1 n+1
where u, v ∈ [0, 1] and I is an indicator function counting the cases, where the ’and’
condition is fulfilled.
For a summary of the most important copula families we refer to Appendix C of [3]
(2007).
9
2.5 Tail Dependence
In the previous section we introduced the concept of copula, which describes the gen-
eral dependence structure between variables. There are many more specific measures
to estimate dependence between two random variables. But standard measures - as
mentioned above at the example of univariate distributions - are mostly controlled by
relatively small moves of the asset prices around their mean. To study large and ex-
treme co-movements, we introduce the coefficient of tail dependence between assets
Xi and Xj , introduced by Sibuya [1] (1960) and advanced by Ledford and Tawn [12]
(1996). It is defined as the probability for the asset Xi to incur a large loss (or gain)
assuming that the asset Xj also undergoes a large loss (or gain) at the same probability
level, in the limit where this probability explores the extreme tails of the distribution
of returns of the two assets.
By definition the coefficient of lower tail dependence λ−
ij and the coefficient of upper
+
tail dependence λij are defined by:
λ− −1 −1
ij = lim+ P r{Xi < Fi (u)|Xj < Fj (u)} (2.30)
u→0
λ+ −1 −1
ij = lim− P r{Xi > Fi (u)|Xj > Fj (u)} (2.31)
u→1
where Fi−1 (u) and Fj−1 (u) represent the quantiles of assets Xi and Xj at the level u.
To give an example for the illustration of lower tail dependence: Assuming σ1 and σ2
represent volatilities of two different stocks, λ− gives the probability that both stocks
exhibit together very high losses.
Since the measure of tail dependence can be expressed in terms of the copula of Xi
and Xj as shown in equations (2.32) for the lower tail dependence and in equation
(2.33) for the upper tail dependence, it is independent of the marginals and symmetric
in Xi and Xj .
C(u, u)
λ−
ij = limu→0+ (2.32)
u
C(u, u)
λ+
ij = limu→1−
1−u
1 − 2u + C(u, u)
= limu→1− (2.33)
1−u
The values for the coefficients of tail dependence are known explicitly for a large number
of different copulas. This can be found i.e. in [14] (2000) published by J. E. Heffernan.
10
Chapter 3
Concepts for the Estimation of Tail

Dependence
Many different concepts and approaches have been developed to calculate coefficients of
tail dependence as described by equation (2.30) and (2.31). This chapter presents and
describes in detail the most important concepts for the estimation of tail dependence
as well as their implementation, and a detailed sensitivity analysis of the calculated
coefficients.
In section (3.1) an overview of several concepts introduced by Heffernan, Tawn,
Coles, Pown and Rockinger is provided. Then section (3.2) covers approaches accord-
ing to Sornette and Malevergne and in the third section a non-parametric estimator
according to Schmidt and Stadtmüller (3.4) is presented.
All the approaches were analyzed on real data. I downloaded historical price sheets
of the index S&P 500 and nine major stocks included in the index to estimate and
analyze the different coefficients of tail dependence. The data can be accessed on
Yahoo finance 1 and is provided in Microsoft Office Excel-CSV format ranging from
the first mentioned to the actual price. It is updated daily and therefore allows the
ongoing adaptation of coefficients. The evaluation of the data sets was performed by
SPSS 16.0, a commercial statistics software that allows all-in-one-step data analysis.
All further calculations were performed by Matlab 7.0.
In the present chapter the methods were applied on two data sets: A smaller data
set ranging from January 1991 up to December 2000 in accordance with [21] (2002),
and a bigger data set ranging from July 1985 up to April 2008. The period of the bigger
data set contained all available data in order to provide as many large fluctuations of
the returns as possible to achieve meaningful information about extreme dependencies.
All the assets studied are traded on the New York stock Exchange and had to
fulfill the following criteria: First they should be among the stocks with the largest
capitalization and second, each of them should have a weight that is smaller than 1%
in the S&P 500 index, so that the dependence does not stem from the overlap with the
index. The nine stocks were composed of: Bristol-Myers Squibb Co. (BMY), Chevron
Corp. (CVX), Hewlett-Packard Co. (HPQ), Coca-Cola Co. (KO), 3M Co. (MMM),
Procter & Gamble Co. (PG), Schering-Plough Corp (SGP), Texas Instruments Inc.
(TXN), and Walgreen Co. (WAG). Starting at this point of the thesis I will refer to the
stocks by their abbreviations given within brackets. A detailed data analyis is provided
in the appendix.
Since Matlab uses vectors, matrices, and tensors for its calculations, the compiler
1
http://finance.yahoo.com
11
can directly access the Excel sheets. In a first step the price data provided in the Excel
sheets was converted into ”historical day-to-day return data” given by equation (3.1)
to achieve a measure of relative volatility
return(t) = log(price(t)) − log(price(t − 1)), (3.1)
where log(·) denotes the natural logarithm, the inverse of the exponential function.
The different methods are presented structured in subsections as follows:
The first subsection respectively gives an insight into the underlying theory of the con-
cepts or in other words, a summary of the most important findings in the papers. The
second subsection respectively provides detailed description concerning the implemen-
tation, analysis and adaptation of variables for better robustness. Within the third
subsection respectively, tail dependence estimates according to the different methods is
analyzed i.e. by bootstrap sampling with replacement for an estimation of error bars.
3.1 Approaches according to Poon, Rockinger, and Tawn

In the first subsection I will start with some concepts for the estimation of dependence
measures for multivariate extreme introduced by Poon, Rockinger, and Tawn published
2004 in [13] (2004) with some further explanations provided by Heffernan 2000 in [14]
(2000), by Coles, Heffernan and Tawn in [15] (1999), and by Ledford and Tawn in
[12] (1996). Then I will go into some details concerning non-parametric estimation of
theses measures and the fitting of parametric models. In the second subsection I will
provide an overwiev on the implementation of non-parametric estimators for asymptotic
dependence χ and asymptotic independence χ.
3.1.1 Theoretical Background

Within this subsection I will provide an overview on the different concepts and es-
timators that describe asymptotic dependence and asymptotic independence for the
bivariate case.
Dependence Measures for Multivariate Extreme

In order to reduce the information contained in the copula C to a single parameter, two
measures of extremal dependence χ and χ were introduced in [15] (1999). Both of them
are needed in order to examine whether two variables are asymptotically dependent or
asymptotically independent. First the bivariate returns X and Y are transformed to
unit Fréchet marginals S and T because of fat-tail distributions for risk asset returns:
S = −1/ log (FX (X)) T = −1/ log (FY (Y )) , (3.2)
where FX and FY are marginal distribution functions for X and Y . Variables S and
T have the same dependence structure as X and Y and are now on a common scale,
meaning that events of the form S > s and T > s for large s, correspond to equally
extreme events for each variable. Asymptotic dependence χ was given by:
χ = lim Pr(T > s | S > s) (3.3)

s→∞
Pr(T > s, S > s)
= lim
s→∞ Pr(S > s)
12
or expressed through copula C:
1 − 2u + C(u, u)
= lim
u→1 1−u
1 − C(u, u)
= lim 2 −
u→1 1−u
log C(u, u)
∼ lim 2 − (3.4)
→1 log u
with 0 ≤ χ ≤ 1. χ is the same as the upper tail dependence coefficient given in equation
(2.31). As mentioned in the previous chapter, S and T are asymptotically dependent if
χ > 0, and they are perfectly dependent if χ = 1. If χ = 0, S and T are asymptotically
independent.
A complementary measure χ developed by Ledford and Tawn (1996) was given to
measure extreme dependence of variables that are asymptotic independent, that is,
where χ = 0:
2 log (Pr(S > s))
χ = lim −1 (3.5)
s→∞ log (Pr(S > s, T > s))
2 log(1 − u)
= lim − 1, (3.6)
s→∞
log Ĉ(u, u)
where −1 < χ ≤ 1, and χ is a measure of the rate at which Pr(T > t | S > s)
approaches zero. For perfect dependence χ = 1 and for independence χ = 0. Hence
values of χ > 0 indicate that S and T are positively associated, and χ < 0 indicates
that S and T are negatively associated in the extremes. For the bivariate normal
dependence structure, χ = ρ, denoting the coefficient of correlation. Other examples
are listed in Heffernan [14] (2000).
Before drawing conclusions about asymptotic dependence based on χ, it is impor-
tant to test if χ = 1. For asymptotically dependent variables, χ = 1 with degree of
dependence given by χ > 0 and for asymptotically independent variables, χ = 0 with
degree of dependence given by χ.
Non-Parametric Estimation of χ and χ

The tail of an univariate heavy-tailed variable Y above a high threshold k is given to:
Pr(Y > y) = L(y) · y −α for y > k, (3.7)
where L(y) is a slowly varying function of y, that is

L(k · y)
lim = 1 for all y > 0. (3.8)
k→∞ L(k)
Then tail index α is estimated by Hill’s estimator:

X −1
1 k Yj,N
ν̂ = j=1 log (3.9)
k Yk,N
13
and L(y), assumed to be constant for y > k, is estimated by:
k
L̂(y) = · (Yk,N )ν̂ (3.10)
N
with Y1,N ≥ Y2,N ≥ · · · ≥ YN,N denoting ordered statistics of the sample containing N
independent and identically distributed realizations of the market return vector Y and
k denoting the number of the threshold value representing the least extreme value still
counted to the tail of the distribution.
Ledford and Tawn [12] (1996) characterized the joint tail behavior by constant η
denoting the coefficient of tail dependence and slowly varying function L(s) and estab-
lished that under weak conditions:
Pr(S > s, T > s) ∼ L(s) · s−1/η as s → ∞ (3.11)
with 0 < η ≤ 1. It follows from the representations in [15] (1999) that
χ = 2η − 1 (3.12)

 c if χ = 1 and L(s) → c > 0 as s → ∞
χ= 0 if χ = 1 and L(s) → 0 as s → ∞ (3.13)

0 if χ < 1
χ = 1 corresponds to η = 1 and yields χ = lims→∞ L(s). Thus the estimation of η
and lims→∞ L(s) provides the basis for the estimation of χ and χ. According to the
modeling assumption for the bivariate case, for Z = min(S, T ):
Pr(Z > z) = Pr (min(S, T ) > z)
= Pr(S > z, T > z) (3.14)
−1/η
= L(z) · z for z > Zk,N
for some high threshold number k. As η is the tail index of the univariate variable Z, it
can be estimated by equation (3.9) using Hill’s estimator restricted to the interval (0, 1 ]
and lims→∞ L(s) can be estimated using equation (3.10). The following estimators are
based on the assumption of independent observations on Z. χ was estimated to:
k !
2 X Zj,N
χ̂ = log −1 (3.15)
k j=1 Zk,N
2
χ̂ + 1
var χ̂ = (3.16)
k
The estimator of χ, only calculated if there is no significant evidence to reject χ = 1,
was proposed to be:
Zk,N · k
χ̂ = (3.17)
N
Zk,N 2 k(N − k)
var (χ̂) = (3.18)
N3
χ̂ is a figure that could be compared to other estimators of tail dependence coefficients,
which are explained in the following sections of chapter (3) because it has the same
underlying definition as provided in equation (2.33) showing the formula of upper tail
dependence.
14
Parametric Joint-Tail Models
Dependence models were estimated over the whole sample space. Conditional on being
above the threshold kX and kY a generalized Pareto distribution was used and below
the empirical distribution function F̃ (x) was used. So the model for FX (x) (and also
FY (y)) was given as:

F̃ (x) if x < kX
FX = −1/αX (3.19)
1 − 1 − F̃ (kX )1 + αX (x − kX )/σX if x ≥ kX ,
where σX and αX are the generalized Pareto distribution scale and shape parameters.
After estimation of the marginal parameter variables, X and Y are transformed to unit
Fréchet form S and T by equation (3.2) to model the dependence structure by para-
metric dependence models. Model parameters are fitted by matching their associated
χ and χ with the non-parametric estimates defined in equations (3.17) and (3.15).
3.1.2 Implementation of Non-Parametric χ and χ

Now I will provide a detailed description about the implementation of a non-parametric
estimator for χ, which is a measure of asymptotic dependence and a non-parametric
estimator for χ, which is a measure of asymptotic independence 2 . Both estimators
were described in chapter (3.1.1).
As already explained, we only calculate χ̂ if there is no significant evidence to reject
χ̂ = 1. Or in other words, we only estimate χ under the assumption that χ = η = 1.
Therefore we first calculate χ̂ and its estimated variance given by var χ̂ to check
whether value 1 lies in the respective confidence interval of χ̂. If that is the case, we
go on and calculate χ̂ and its variance estimate var (χ̂) to obtain a measure for tail
dependence that can be compared to estimates by other methods. If χ̂ 6= 1, we set
χ̂ = 0 assuming asymptotic independence between return vectors X and Y .
First we transform return vectors X and Y into vectors of respective Fréchet
marginals given by S and T . Therefore we estimate the survival functions F X (x)
and F Y (y) of the univariate heavy-tailed variables X an Y above a high threshold
defined by threshold number k with k/N = 4% of most extreme return data by:
F X (x) = L(x) · x−α (3.20)

−α
F Y (y) = L(y) · y , (3.21)
where L is a slowly varying function estimated as mean value L in the extreme tail:
k
1X j
L(x) = · (Xj,N )α (3.22)
k j=1 N
k
1X j
L(y) = · (Yj,N )α , (3.23)
k j=1 N
2
The matlab m-file for the implementation of χ̂ is denoted by: lambda porota.m and enclosed to the
appendix and the data CD
15
or estimated as mean value Lc , corrected by the most extreme outliers, with c =
[0.005 ∗ N] and [·] denoting integer numbers:
X j k
1
Lc (x) = · (Xj,N )α (3.24)
k − c + 1 j=c N
X j k
1
Lc (y) = · (Yj,N )α , (3.25)
k − c + 1 j=c N
and α estimated by Hill’s estimator given by:
X −1
1 k Xj,N
ν̂X = j=1 log (3.26)
k Xk,N
X −1
1 k Yj,N
ν̂Y = j=1 log (3.27)
k Yk,N
with X1,N ≥ X2,N ≥ · · · ≥ XN,N and Y1,N ≥ Y2,N ≥ · · · ≥ YN,N denoting ordered
statistics of the sample containing N realizations of the market return vector Y and
X. Now transformation to S and T is performed as follows:
1
Ŝ = − (3.28)
log 1 − Fˆ X (x)
1
T̂ = − (3.29)
log 1 − Fˆ Y (y)

Now we come to the estimation of χ and var χ̂ by first calculation of Z applying
relation Z = min(S, T ) element-wise to vectors X and Y , and then using:
k !
2 X Zj,N
χ̂ = log −1 (3.30)
k j=1 Zk,N
2
χ̂ + 1
var χ̂ = (3.31)
k

The estimator of χ and var (χ), only calculated if {1} ∈ χ̂ ± var χ̂ by:
Zk,N · k
χ̂ = (3.32)
N
Zk,N 2 k(N − k)
var (χ̂) = (3.33)
N3
To achieve estimates for the lower tail, we can just sort our data in ascending order
and multiply the ordered
q sample by (−1). Tables (3.1) and (3.2) show results of the
2
Z
k,N k(N −k)
estimated χ and σ̂ = N3
for the smaller and the bigger reference sample of
the index S&P 500 and the nine assets.
16
First of all we notice that only for one of the nine assets and the index S&P 500
χ = 1 can be rejected. This can be seen in table (3.1) showing estimates for the smaller
reference sample, where asset Chevron Corp. (CVX) in the negative uncorrected tail is
marked with an asterisk. In both tables (3.1) and (3.2) only estimates of χ are provided
because χ̂ underlies the same definition as the concept of upper tail dependence given in
equation (2.33) and can therefore later on be compared to estimates by other methods.
We also find that there is a big difference between tail dependence estimated for
uncorrected tails on intervals 1, 2 . . . k and tail dependence estimates for corrected tails
on intervals c, c + 1 . . . k, with c = [0.005 ∗ N] and [·] denoting integer numbers, in the
lower tail of the smaller data set given in table (3.1). For upper tails of both data
sets and smaller tails of the bigger data set the estimates for corrected and uncorrected
tails are more consistent with each other and also more consistent over time because the
bigger of the two data sets contains the smaller one and the two respective estimates
are similar for most assets. A reason for these big discrepancies in the lower tail of the
smaller sample might be distortion caused by extreme outliers. Indeed, looking at the
return data sets it can be observed that most extreme values or outliers lie primarily
in the negative tails. What furthermore can be observed is that in case of tail depen-
dence coefficient estimates for corrected tails, left-tail dependence or tail dependence
of negative tails tends to be stronger than right-tail dependence or tail dependence of
positive tails. This is consistent with previous literature i.e. [13] (2004). Anyway, look-
ing at estimates for uncorrected tails, we observe that right-tail dependence tends to be
stronger than left-tail dependence. Estimated standard deviations σ̂ were calculated to
be around 6%-7% of the estimates. Thich seems accurate enough.
For comparison I calculated error bars by bootstrap sample estimates. Results for
error bars estimated by bootstrap sampling with replacement are shown in table (3.3)
for the smaller reference data set and in table (3.4) for the bigger reference data set.
Looking at tails that are not corrected for outliers, deviations calculated by boot-
strap sampling for both the smaller and the bigger data sample, primarily for nega-
tive tails,
q are significantly higher in most cases than calculated by the given relation:
Z 2 k(N −k)
k,N
σ̂ = N3
. Comparing standard deviations ’std bs’ with 90% quantiles and
95%, we observe that error distributions are not Gaussian. Looking at 90% quantiles
of estimates performed for corrected tails χc , the error bars are in most cases similar to
σ̂ shown in tables (3.1) and (3.2), but for some assets also higher. I will come back to
the estimation of error bars by bootstrap sampling with replacement later on and also
provide an explanation about how it is performed 3 .
3
The matlab m-file for the bootstrap sampling of χ̂ is denoted by: bootstr porota.m and enclosed to the
data CD
17
upper tail σ̂ upper tail σ̂ lower tail σ̂ lower tail σ̂
tail 1...k c...k 1...k c...k

χ̂
BMY 0.94 0.09 0.92 0.09 0.50 0.05 0.94 0.09
CVX 0.94 0.09 0.92 0.09 0.00* 0.00* 0.94 0.09
HPQ 0.94 0.09 0.91 0.09 0.40 0.04 0.94 0.09
KO 0.94 0.09 0.92 0.09 0.26 0.03 0.94 0.09
MMM 0.94 0.09 0.92 0.09 0.42 0.04 0.94 0.09
PG 0.94 0.09 0.92 0.09 0.46 0.05 0.94 0.09
SGP 0.94 0.09 0.92 0.09 0.34 0.03 0.94 0.09
TXN 0.94 0.09 0.92 0.09 0.52 0.05 0.94 0.09
WAG 0.94 0.09 0.92 0.09 0.36 0.04 0.94 0.09
Table 3.1: Estimated values of upper and lower tail dependence for S&P 500 index with a set
of nine major assets traded on the New York stock Exchange calculated by
q a non-parametric
2
Z ·k Z k(N −k)
approach: χ̂+,− = k,N N and corresponding standard deviation: σ̂ (χ̂) = k,N
N3
. The
tail represents the most extreme 4% of the return values during a time interval from January
1991 to December 2000. ’tail’ shows the calculation interval of L with c = 13 and k = 100,
and ∗ denotes χ̂ 6= 1 and therefore χ̂ = 0.
upper tail σ̂ upper tail σ̂ lower tail σ̂ lower tail σ̂
tail 1...k c...k 1...k c...k

χ̂
BMY 0.96 0.06 0.93 0.06 0.79 0.05 0.97 0.06
CVX 0.96 0.06 0.93 0.06 0.35 0.02 0.97 0.06
HPQ 0.96 0.06 0.92 0.06 0.74 0.05 0.97 0.06
KO 0.93 0.06 0.93 0.06 0.54 0.04 0.97 0.06
MMM 0.96 0.06 0.93 0.06 0.69 0.04 0.97 0.06
PG 0.96 0.06 0.93 0.06 0.58 0.04 0.97 0.06
SGP 0.96 0.06 0.93 0.06 0.74 0.05 0.97 0.06
TXN 0.96 0.06 0.93 0.06 0.70 0.05 0.97 0.06
WAG 0.96 0.06 0.93 0.06 0.73 0.05 0.97 0.06
Table 3.2: Estimated values of upper and lower tail dependence for S&P 500 index with a set
of nine major assets traded on the New York stock Exchange calculated by
q a non-parametric
2
Z ·k Z k(N −k)
approach: χ̂+,− = k,N N and corresponding standard deviation: σ̂ (χ̂) = k,N
N3 . The
tail represents the most extreme 4% of the return values during a time interval from July
1985 to April 2008. ’tail’ shows the calculation interval of L with c = 29 and k = 229, and ∗
denotes χ̂ 6= 1 and therefore χ̂ = 0.
18
m=2507 bs=1000
upper tail lower tail
χbs,mean χbs,mean
χ k=100 rel err max dev 95% q 90% q std bs k=100 rel err max dev 95% q 90% q std bs
BMY 0.92 0.02 0.91 0.02 0.01 0.08 0.50 0.00 0.52 0.52 0.42 0.32
CVX 0.93 0.01 0.94 0.01 0.01 0.04 0.35 Inf 0.64 0.61 0.60 0.41
HPQ 0.93 0.01 0.93 0.01 0.01 0.07 0.35 0.11 0.63 0.53 0.41 0.22
KO 0.91 0.04 0.90 0.04 0.03 0.20 0.36 0.39 0.64 0.63 0.63 0.30
MMM 0.91 0.03 0.88 0.03 0.03 0.20 0.56 0.34 0.62 0.52 0.38 0.31
PG 0.92 0.02 0.93 0.02 0.02 0.10 0.34 0.25 0.60 0.51 0.42 0.28
SGP 0.92 0.02 0.89 0.02 0.02 0.10 0.34 0.01 0.62 0.44 0.28 0.19
TXN 0.93 0.01 0.92 0.01 0.01 0.04 0.42 0.20 0.53 0.41 0.41 0.27
WAG 0.91 0.03 0.94 0.03 0.03 0.10 0.29 0.20 0.60 0.33 0.32 0.21
19
χc
BMY 0.90 0.02 0.92 0.03 0.03 0.03 0.90 0.04 0.92 0.11 0.11 0.20
CVX 0.90 0.02 0.12 0.03 0.03 0.02 0.83 0.11 0.81 0.82 0.22 0.31
HPQ 0.90 0.01 0.93 0.03 0.03 0.03 0.91 0.03 0.91 0.14 0.12 0.22
KO 0.91 0.01 0.14 0.04 0.03 0.02 0.90 0.04 0.88 0.09 0.09 0.21
MMM 0.91 0.01 0.13 0.04 0.03 0.02 0.90 0.04 0.89 0.13 0.10 0.24
PG 0.91 0.01 0.12 0.04 0.03 0.02 0.93 0.00 0.91 0.12 0.12 0.13
SGP 0.90 0.01 0.91 0.04 0.03 0.03 0.87 0.07 0.91 0.90 0.12 0.20
TXN 0.90 0.02 0.09 0.03 0.03 0.02 0.84 0.10 0.83 0.82 0.21 0.29
WAG 0.91 0.01 0.10 0.04 0.03 0.02 0.93 0.01 0.87 0.14 0.12 0.10
Table 3.3: Establishing the uncertainty of non-parametrically estimated upper and lower tail dependence coefficients χ̂ by creating 1000 bootstrap
samples of historical return data tables for S&P 500 index and corresponding asset returns and calculation of quantiles, extreme values and standard
deviations of the results. The tails represent the most extreme 4% (excluding highest 0.5% for χc ) of the return values during a time interval from
January 1991 to December 2000.
m=5736 bs=1000
χbs,mean χbs,mean
χ k=229 rel err max dev 95% q 90% q std bs k=229 rel err max dev 95% q 90% q std bs
BMY 0.92 0.03 0.92 0.04 0.03 0.20 0.74 0.06 0.74 0.71 0.21 0.21
CVX 0.95 0.01 0.89 0.01 0.01 0.05 0.43 0.20 0.52 0.47 0.42 0.22
HPQ 0.95 0.01 0.86 0.01 0.01 0.04 0.71 0.04 0.72 0.71 0.44 0.23
KO 0.87 0.07 0.90 0.88 0.09 0.21 0.51 0.06 0.54 0.52 0.40 0.22
MMM 0.79 0.20 0.82 0.79 0.80 0.40 0.68 0.02 0.68 0.31 0.20 0.23
PG 0.94 0.01 0.91 0.01 0.01 0.08 0.44 0.20 0.52 0.40 0.41 0.34
SGP 0.95 0.01 0.93 0.01 0.01 0.05 0.58 0.20 0.64 0.62 0.59 0.29
TXN 0.94 0.02 0.90 0.02 0.02 0.10 0.59 0.20 0.63 0.62 0.61 0.28
WAG 0.95 0.01 0.94 0.01 0.01 0.04 0.70 0.04 0.70 0.69 0.21 0.27
20
χc
BMY 0.92 0.01 0.93 0.03 0.02 0.07 0.94 0.02 0.91 0.05 0.04 0.13
CVX 0.92 0.00 0.04 0.03 0.02 0.01 0.92 0.05 0.93 0.13 0.07 0.22
HPQ 0.92 0.01 0.05 0.03 0.02 0.01 0.96 0.01 1.01 0.05 0.04 0.10
KO 0.92 0.00 0.92 0.03 0.03 0.05 0.90 0.07 0.93 0.90 0.10 0.24
MMM 0.90 0.04 0.90 0.06 0.05 0.20 0.95 0.02 0.93 0.12 0.04 0.09
PG 0.92 0.01 0.91 0.03 0.02 0.03 0.95 0.02 1.03 0.06 0.05 0.10
SGP 0.92 0.01 0.04 0.02 0.02 0.01 0.95 0.02 1.00 0.09 0.04 0.09
TXN 0.92 0.01 0.87 0.03 0.02 0.06 0.92 0.04 0.93 0.13 0.07 0.22
WAG 0.92 0.01 0.05 0.03 0.02 0.01 0.95 0.02 0.92 0.10 0.05 0.10
Table 3.4: Establishing the uncertainty of non-parametrically estimated upper and lower tail dependence coefficients χ̂ by creating 1000 bootstrap
deviations of the results. The tails represent the most extreme 4% (excluding highest 0.5% for χc ) of the return values during a time interval from
July 1985 to April 2008.
3.2 Approaches according to Sornette and Malevergne
A set of parametric and non-parametric estimators for lower and upper tail dependence
is proposed in [19] (2006), [20] (2004), and [21] (2002) assuming a linear factor model
between stock returns and market returns. Within this section the implementation and
analysis of firstly the non-parametric approach, secondly the parametric approach, and
thirdly a so-called β-smile improvement is discussed.

In this subsection a summary of the papers [20] (2004) and [21] (2002) is provided. First
we present a non-parametric approach and secondly a parametric approach to calculate
tail dependence between an asset and its market index. Finally, the calculation of tail
dependence between two assets related by a factor model is explained.
The Non-Parametric Approach by Sornette & Malevergne

A linear additive single factor model was introduced to relate asset fluctuations to
market fluctuations:
X = β · Y + ε, (3.34)
where X is a vector of asset returns and Y is the vector of corresponding index returns.
β is the regression coefficient of the components of X to its corresponding components
Y determined by the least squares method with ε denoting the vector of idiosyncratic
noises assumed independent of Y .
A general result concerning the tail dependence generated by factor models was
derived from the definition of upper tail dependence given by equation (2.31). It is
given by:
Z ∞
+
λ = f (x)dx, (3.35)
max{1, βl }
with
FX−1 (u)
l = lim− −1 , (3.36)
u→1 FY (u)
t · PY (t · x)
f (x) = lim , (3.37)
t→∞ F Y (t)
where FX and FY are the marginal distribution functions of X and Y , and PY is the
probability density function of Y . F Y = 1 − FY is the complementary cumulative
distribution function of Y . A similar expression holds for the coefficient of lower tail
dependence. A non-vanishing coefficient of tail dependence must have a limit function
f (x) that is non-zero and the constant l must remain finite.
In [20] (2004) it is explained that (3.35) even holds if factor Y and the idiosyncratic
noise ε are dependent, provided that this dependence is not too strong. Another
important statement in this paper is the absence of tail dependence for rapidly varying
factors, which describes the Gaussian, exponential, and any other distribution decaying
faster than any power law, for any arbitrary distribution of the idiosyncratic noise.
21
A general result valid for any regularly varying distribution was provided. Let F Y
follow a regularly varying distribution with tail index α:
F Y (y) = L(y) ∗ y −α (3.38)
where L(y) is a slowly varying function, i.e.
L(t · y)
lim =1 for all y > 0, (3.39)
t→∞ L(t)
then:
1
λ+ = n oα (3.40)
max 1, βl
with l given by equation (3.36). To obtain λ− the limit u → 1− has to be replaced by

u → 0+ .
The Parametric Approach by Sornette & Malevergne

Following the parametric approach according to Sornette & Malevergne we estimate
a parametric form of tail distribution, which for extreme market risks is assumed to
follow a power-law distribution. For ν = νY = νε we have F Y (y) = Ĉy ∗ y −ν and
F ε (ε) = Ĉε ∗ ε−ν for large y and ε, then the coefficient of tail dependence is a simple
function of the ratio Cε /CY of the scale factors:
1
λ= Cε
(3.41)
1 + β −α · CY
If the tail indexes αY and αε of the distribution of the factors and the residue are
different, then λ = 1 for αY < αε and λ = 0 for αY > αε .
So far we have only considered a single asset with vector of returns X. Let us now
consider a portfolio of assets with vectors of returns Xi , where each asset follows the
linear factor model:
Xi = βi · Y + εi (3.42)
P
with independent noises εi , whose scale factors are Cεi . The portfolio P X = wi Xi ,
with weights wi , also follows the
P factor model with a parameter β = wi βi and noise
ε, whose scale factor is Cε = |wi |ν · Cεi . The tail dependence between the portfolio
and the market index can now be obtained by equation (3.41):
P −1
|wi|α · Cεi
λ= 1+ P (3.43)
( wi βi )α · CY
Tail Dependence between two Assets related by a Factor Model

The tail dependence between two assets related by a factor model given by:
X1 = β1 · Y + ε1 (3.44)
X2 = β2 · Y + ε2 (3.45)
22
is equal to the weakest tail dependence between the assets X1 and X2 , and their
common factor Y :
λij = min{λi , λj } (3.46)
Since the dependence between two assets is due to their common factor, this dependence
cannot be stronger than the weakest dependence between each of the assets and the
factor. This result shows that it is sufficient to study the tail dependence between the
assets and their common factor to obtain tail dependence between any pair of assets.
Estimation of Tail Indexes

For all our approaches according to Sornette & Malevergne we need to calculate a tail
index α. This can be conducted independently of the method. As we assume stock
and market returns to be asymptotically power-law distributed we can calculate the
tail indexes for both positive and negative tails using Hill’s estimator given by:
X −1
1 k Yj,N
ν̂ = j=1 log , (3.47)
k Yk,N
where Y1,N ≥ Y2,N ≥ · · · ≥ YN,N denote the ordered statistics of the sample containing
N independent and identically distributed realizations of market return vector Y and
k denotes the number of the threshold value representing the least extreme value still
counted to the tail of the distribution. Assuming that the tail index of each asset αXi
is the same as the tail index of the market index αY containing the asset, k denotes the
number of the thteshold value of the N sorted return observation or the smallest value
for each, market index and asset, still considered to belong to the tail. Hill’s estimator
is asymptotically normal distributed with mean α and variance α2 /k. But for finite k
it is known that the estimator is biased.
To find out whether tail indexes calculated by Hill’s estimator are accurate, I per-
formed a test under conditions similar to our situation: Assuming heavy tail distributed
market returns with a tail index of α = 3 and given a general formulation of heavy tail
probability density distribution functions:
α
p(y) ∼ , (3.48)
y 1+α
I generated n = 100 random points on an uniformly distributed interval ranging from
zero to one (p(r) = 1, for r U[0,1]).
Then I performed a variable transformation applying p(y)dy = p(r)dr to convert the
uniformly distributed random values into heavy tail distributed values given by relation
(3.48). Putting in p(r) and p(y) yields:
α
dy = dr (3.49)
y 1+α
and by integral of both sides: C − y −α = r, where constant C can be calculated using
the probability condition:
1
zeros(C − y −α) = {C − α }, for ∀C > 0
Z Y2 ∞
1
limY2 →∞ p(y)dy = − α = C = 1, for ∀α > 0
C− α
1
y C − α1
23
and finally I obtained:
α1
1
y(r) = , (3.50)
1−r
which allowed me to transform our uniformly distributed data into data distributed
according to relation (3.48) with α = 3.
Putting now the transformed values into equation (3.47) to calculate Hill’s estimator,
I could test whether the output was a tail index ν̂ close enough to three representing
the true value α of the tail index for our transformed data.
Conducting this procedure several times allowed me to check whether the standard
deviation fulfills the above described relation of:
std(ν̂) ∼ 1
=√ , (3.51)
α k
which, given α = 3 and n = 100, says that std(ν̂) ∼ = 0.3 and therefore all ν̂ should be
within an interval of 3 ± 2 ∗ 0.3 if the error follows a Gaussian distribution as requested.
I performed the above described sampling 10’000 times and received a mean value of
mean(ν̂) = 3.06, which shows a small bias of 2%, and a 95% deviation-quantile of 0.63,
which is close to the above calculated 0.6. Therefore I conclude that our smaller sample
size with about 100 return data points perceived as tail data already agrees well with
the general assumption of Hill’s estimator to be asymptotically normally distributed.
However, performing this little affirmation we stressed the assumption of using in-
dependent and identically distributed (i.i.d.) data samples, which unfortunately is not
the case for real financial data. Applying Engle’s test for the presence of ARCH ef-
fects [17] (1982) to our real financial time series the result shows significant evidence in
support of GARCH effects (heteroscedasticity)4 . As shown by Kearns and Pagan [22]
(1997) for heteroskedastic time series the variance of the estimated tail index can be
seven times larger than the variance given by the asymptotic normality assumption.
For comparison I also implemented the OLS (ordinary least squares) log-log rank-size
tail index estimate proposed by Gabaix [23] (2006) defined by:
log(Rank − 1/2) = a − b̂γn · log(Size), (3.52)
with the tail indexqgiven by b̂γn . A standard error of the OLS estimate b̂γn of the slope
was estimated to n2 b̂γn in the paper. Assuming a tail index equal to three as above,
this yields a standard error of 0.42, which is higher compared to Hill’s estimator.
We can now perform the same little check as above to see how Gabaix’s b̂γn estimator
performs for i.i.d. data samples. Sampling 10’000 times, I obtained a mean value of
mean(b̂γn ) = 3.015, which only constitutes 0.5% bias and a 95% deviation-quantile of
0.83. This perfectly agrees with the estimated standard error given in the paper [23]
(2006) but still is a little higher than the standard deviation of Hill’s estimator.
Now we can apply both, Hill’s estimator ν̂ and Gabaix’s b̂γn estimator, on real data
for comparison and subsequently perform bootstrap sampling with replacement (Monte
Carlo simulation) to find out, whether the fact, that real financial time series exhibit
internal dependence, in terms of time varying volatility clustering (large price changes
come in clusters), impact deviation quantiles or in other words: whether Hill’s estimator
4
Engle’s ARCH test is described in subsection (3.2.3)
24
4
S&P 500
BMY
3.8 CVX
HPQ
3.6 KO
MMM
PG
3.4 SGP
TXN
WAG
3.2
ν(k)
2.8
2.6
2.4
2.2
0.03 0.04 0.05 0.06 0.07 0.08 0.09 0.1
k/N
Figure 3.1: Tail index estimators ν̂ (Hill’s estimator) for the upper tails of index S&P 500
and 9 major assets included plotted in dependence of threshold k on a time interval ranging
from July 1985 to April 2008.
still performs better in a deviation quantile sense compared to Gabaix’s b̂γn estimator
when it is applied to real financial time series.
In figures (3.1) and (3.2) I plotted both estimators in dependence of threshold k for
the upper tails and in figures (3.3) and (3.4) for the lower tails. In the positive tails
the developing of the values with increasing k looks quite similar for the tail indexes
calculated by Hill’s estimator and the tail indexes calculated by Gabaix’s estimator,
although the b̂γn (k) estimator is less sensitive to k. In the negative tails b̂γn looks quite
different from ν̂(k). Assets are increasing in k, whereas the index S&P 500 is slightly
decreasing and at a quite high threshold of 15% they kind of converge. What all the
assets and the index S&P 500 have in common in the negative tails of b̂γn is that they
first tend to rise and then build something like a plateau before they drop. This plateau
is also apparent in the positive tails, but there it is much less distinctive and at much
smaller thresholds k.
Now we have to define a relevant range for the estimation of the tail index in terms
of threshold k. As k increases, the variance of the estimator decreases while its bias
increases. It is reported in [20] (2004) that an accurate determination of the optimal k
by optimization algorithms is rather difficult. Although a relevant range for k between
1% and 5% of total data for the estimation of the tail index was given, I decided to
search visually for a k that looks consistent for the 9 assets and the index S&P 500. The
b̂γn estimators shown look quite smooth in the area of 4%. Some assets show something
like a plateau around there or at least the tail index estimators seem to be stable there.
Table (3.5) shows the results of tail indexes of all assets for both sample sizes,
the index S&P 500, and the residues ε obtained by regressing each asset on the S&P
500 index, assuming a threshold of k = 4%. It is interesting that Hill’s estimator is
smaller than Gabaix b̂γn estimator for the upper tail and is systematically larger for the
25
4.2
S&P 500
BMY
CVX
4
HPQ
KO
MMM
3.8 PG
SGP
TXN
WAG
3.6
n
γ
b
3.4
3.2
2.8
0.03 0.04 0.05 0.06 0.07 0.08 0.09 0.1
k/N
Figure 3.2: Tail index estimators b̂γn (Gabaix’s estimator) for the upper tails of index S&P 500
3.5
S&P 500
BMY
CVX
HPQ
KO
MMM
PG
3 SGP
TXN
WAG
ν(k)
2.5
2
0.03 0.04 0.05 0.06 0.07 0.08 0.09 0.1
k/N
Figure 3.3: Tail index estimators ν̂ (Hill’s estimator) for the lower tails of index S&P 500 and
9 major assets included plotted in dependence of threshold k on a time interval ranging from
July 1985 to April 2008.
26
3.2
S&P 500
BMY
3 CVX
HPQ
2.8 KO
MMM
PG
2.6 SGP
TXN
WAG
2.4
bn
γ
2.2
1.8
1.6
1.4
0.03 0.04 0.05 0.06 0.07 0.08 0.09 0.1
k/N
Figure 3.4: Tail index estimators b̂γn (Gabaix’s estimator) for the lower tails of index S&P 500
lower tail. Furthermore, it is shown in [23] (2006) that although the standard error of
the Hill’s estimator is less than that of the tail index estimate b̂γn , its (small sample)
bias in the case of deviation from the power law is (typically) greater than that of b̂γn .
Perhaps, we indeed under-estimate the lower tail such that the exponent is probably
smaller than given by Hill’s estimator. To check whether our assumption of equal tail
indexes of asset returns, residues, and index returns is accurate with our estimation
methods and data sets, I performed a simple test of means at the 95% confidence level
for any given quantile. Values that reject the equality hypothesis are asterisked. As
we can see, the results were inconclusive. Anyway, the performed tests were based on
the assumption of asymptotic
p normality √
in the distribution of the estimates with the
γ
standard deviations of 2/n · b̂n and ν̂/ k, which might be too restrictive. The true
distribution is probably ’wilder’ than Gaussian as explained above. This would expand
the confidence interval. It is nevertheless interesting to notice that in the negative
tails of b̂γn , although the equality hypothesis was rejected for all assets and residues
because estimates for assets and residues were unexeptionally lower than for the S&P
500 index, tail index estimates of asset returns are nearly identical to tail indexes of
their corresponding residues obtained by regression on the index S&P 500.
As we can obtain in the upper parts of the tables (3.6) and (3.7) where the smaller
samples with 100 data points considered as tail data are shown, 95% quantiles of the
upper tails show good accordance to our i.i.d. estimates, whereas 95% quantiles of
lower tails tend to be somewhat higher. In terms of deviation quantiles Hill’s estimator
still outperforms Gabaix’s b̂γn estimator. What we can observe in the lower parts of the
tables is that deviation quantiles become obviously smaller when we augment sample
sizes. This counts for both estimators.
27
+tail −tail
ν bγn ν bγn ν bγn ν bγn

k 100 100 100 100 229 229 229 229 100 100 100 100 229 229 229 229
Asset ε Asset ε Asset ε Asset ε Asset ε Asset ε Asset ε Asset ε
BMY 3.36 3.14 3.66 3.63 3.31 3.05 3.59 3.38 2.55 2.57 1.80* 1.76* 2.46* 2.46* 2.04* 1.97*
CVX 3.73 3.67 4.26 3.89 3.49* 3.54* 3.83 3.60 3.61 3.61 2.30* 2.27* 3.14 3.20 2.33* 2.29*
HPQ 3.42 3.02 3.94 3.42 2.88 2.65* 3.29 3.01 2.82 3.02 1.80* 1.70* 2.91 2.53* 2.35* 2.17*
KO 3.50 3.08 3.70 3.36 3.48 3.40 3.36 3.24 2.79 3.08 1.80* 1.75* 2.48* 2.59* 1.80* 1.79*
MMM 3.80 3.34 4.10 3.86 3.56* 3.22 3.69 3.54 2.89 3.34 2.23* 2.21* 2.48* 2.39* 2.04* 1.96*
28
PG 3.40 3.14 3.57 3.76 3.19 3.03 3.60 3.39 2.45* 3.14 1.57* 1.55* 2.40* 2.41* 1.69* 1.66*
SGP 3.37 3.11 3.78 3.72 3.36 2.97 3.88 3.45 2.69 3.11 1.70* 1.65* 2.40* 2.27* 1.84* 1.78*
TXN 3.51 3.52 3.99 3.99 3.03 3.10 3.34 3.34 2.67 3.52 1.77* 1.77* 2.73 2.68* 2.05* 2.03*
WAG 3.61 3.99* 3.92 4.22 3.33 3.40 3.81 3.58 2.42* 3.99* 1.46* 1.43* 2.44* 2.65* 1.93* 1.92*
S&P 500 3.23 − 3.71 − 3.09 − 3.56 − 3.16 − 3.37 − 3.13 − 3.04 −
Table 3.5: Comparison of tail index estimators ν̂ (Hill’s estimator) and b̂γn (estimator by Gabaix) for positive and negative tails of the S&P 500
index, 9 included assets, and the residues ε obtained by regressing each asset on the S&P 500 index, during the time intervals ranging from January
1991 to December 2000 with a 4% quantile of k = 100 values and from July 1985 to April 2008 with a 4% quantile of k = 229 values. Values with
∗ represent tail indexes, which can’t be considered equal to the respective S&P 500 index at the 95% condfidence level.
m=2507 bs=1000
νmean νmean
ν k=100 rel err max dev 95% q 90% q std bs k=100 rel err max dev 95% q 90% q std bs
Index 3.31 0.02 1.01 0.60 0.52 0.32 3.19 0.01 0.82 0.62 0.53 0.34
BMY 3.42 0.02 1.22 0.64 0.52 0.31 2.62 0.03 1.10 0.72 0.60 0.28
CVX 3.78 0.01 1.31 0.61 0.53 0.30 3.69 0.02 1.61 1.00 0.82 0.50
HPQ 3.50 0.02 1.10 0.63 0.51 0.29 2.89 0.02 1.31 0.83 0.71 0.40
KO 3.55 0.02 1.28 0.62 0.50 0.28 2.86 0.03 1.32 0.84 0.74 0.43
MMM 3.85 0.01 1.36 0.67 0.58 0.40 2.94 0.02 1.20 0.71 0.62 0.41
PG 3.45 0.02 1.32 0.59 0.53 0.31 2.51 0.03 1.24 0.70 0.61 0.44
SGP 3.44 0.02 1.20 0.61 0.50 0.31 2.75 0.02 1.33 0.82 0.61 0.43
TXN 3.56 0.01 1.21 0.60 0.52 0.32 2.74 0.03 1.24 0.70 0.62 0.42
WAG 3.68 0.02 1.30 0.63 0.50 0.30 2.48 0.02 1.20 0.71 0.63 0.40
m=5736 bs=1000
29
ν k=229 k=229
Index 3.10 0.01 0.62 0.33 0.32 0.21 3.16 0.01 0.58 0.42 0.33 0.24
BMY 3.32 0.00 0.61 0.40 0.31 0.21 2.48 0.01 0.50 0.40 0.34 0.21
CVX 3.50 0.00 0.71 0.42 0.34 0.21 3.17 0.01 0.82 0.53 0.42 0.22
HPQ 2.89 0.00 0.50 0.33 0.32 0.22 2.93 0.01 0.71 0.44 0.42 0.20
KO 3.50 0.01 0.74 0.43 0.41 0.22 2.51 0.01 0.64 0.39 0.31 0.21
MMM 3.57 0.00 0.73 0.41 0.40 0.21 2.51 0.01 0.63 0.41 0.34 0.22
PG 3.20 0.00 0.61 0.33 0.32 0.23 2.51 0.01 0.70 0.42 0.32 0.22
SGP 3.37 0.00 0.61 0.40 0.28 0.23 2.42 0.01 0.63 0.40 0.34 0.20
TXN 3.04 0.00 0.62 0.33 0.29 0.24 2.75 0.01 0.71 0.41 0.33 0.24
WAG 3.34 0.00 0.62 0.40 0.31 0.23 2.46 0.01 0.60 0.40 0.32 0.20
Table 3.6: Establishing the uncertainty of estimated upper and lower tail indexes ν̂ by creating bs = 1000 bootstrap samples of historical return
data for S&P 500 and included assets and calculation of bootstrap mean value νmean with rel. error from the original value, deviation quantiles
and standard deviation from νmean , and most extreme deviation value. The tail represents the most extreme 4 % of the return values during a
time interval ranging from January 1991 to December 2000 (k = 100 values) and from July 1985 to April 2008 (k = 229 values).
m=2507 bs=1000
bγmean bγmean
bγn k=100 rel err max dev 95% q 90% q std bs k=100 rel err max dev 95% q 90% q std bs
Index 3.71 0.00 1.42 0.72 0.64 0.32 3.43 0.02 2.22 0.92 0.82 0.53
BMY 3.66 0.00 1.50 0.72 0.52 0.31 1.93 0.07 2.91 1.21 0.81 0.60
CVX 4.26 0.00 1.52 0.80 0.60 0.40 2.84 0.20 3.02 2.02 1.72 1.22
HPQ 3.95 0.00 1.24 0.63 0.51 0.32 1.92 0.06 3.50 0.84 0.74 0.51
KO 3.72 0.01 1.51 0.81 0.68 0.41 1.96 0.09 2.23 1.54 1.00 0.62
MMM 4.12 0.01 1.52 0.80 0.70 0.43 2.45 0.11 2.00 1.23 1.11 0.74
PG 3.59 0.00 1.44 0.81 0.61 0.42 1.67 0.06 2.61 0.71 0.64 0.42
SGP 3.79 0.01 1.58 0.73 0.62 0.42 1.87 0.10 3.03 1.22 0.66 0.61
TXN 4.00 0.00 1.54 0.79 0.66 0.43 1.86 0.05 2.12 0.93 0.63 0.40
WAG 3.94 0.01 1.59 0.80 0.70 0.41 1.55 0.06 2.30 0.80 0.60 0.42
m=5736 bs=650
30
bγn k=229 k=229

Index 3.56 0.00 0.93 0.50 0.38 0.19 3.07 0.01 1.42 0.81 0.63 0.41
BMY 3.60 0.00 1.10 0.42 0.42 0.18 2.07 0.02 1.40 0.60 0.52 0.31
CVX 3.83 0.00 0.92 0.57 0.50 0.30 2.45 0.05 2.11 1.22 0.84 0.58
HPQ 3.28 0.00 0.62 0.50 0.41 0.22 2.45 0.04 1.44 0.82 0.60 0.39
KO 3.38 0.01 1.21 0.75 0.71 0.41 1.85 0.03 1.68 0.71 0.52 0.38
MMM 3.69 0.00 0.84 0.42 0.40 0.21 2.10 0.03 1.39 0.73 0.64 0.39
PG 3.58 0.01 0.83 0.50 0.39 0.22 1.74 0.03 1.40 0.58 0.40 0.37
SGP 3.86 0.01 1.00 0.51 0.40 0.30 1.88 0.02 1.13 0.47 0.42 0.30
TXN 3.34 0.00 0.62 0.42 0.40 0.21 2.13 0.04 1.90 0.70 0.51 0.32
WAG 3.82 0.00 1.31 0.53 0.42 0.33 1.98 0.02 1.53 0.59 0.51 0.32
Table 3.7: Establishing the uncertainty of estimated upper and lower tail indexes b̂γn by creating bootstrap samples (bs) of historical return data
for S&P 500 and included assets and calculation of bootstrap mean value νmean with rel. error from the original value, deviation quantiles and
standard deviation from bγmean , and most extreme deviation value. The tail represents the most extreme 4 % of the return values during a time
interval ranging from January 1991 to December 2000 (k = 100 values, bs = 1000) and from July 1985 to April 2008 (k = 229 values, bs = 650).
3.2.2 Implementation of the Non-Parametric Approach
Within this subsection I provide an overwiev of the implementation of the non-parametric
approach by Sornette & Malevergne. It is denoted non-parametric because of the es-
timation of the constant l by equation (3.36). We don’t give estimates of the scale
factors of the tail distribution Cε and CY . Instead, we simply consider N sorted re-
alizations of return vectors X and Y denoted by X1,N ≥ X2,N ≥ · · · ≥ XN,N and
Y1,N ≥ Y2,N ≥ · · · ≥N,N and observe that the ratio of the empirical quantiles remains
remarkably stable for small or large k.
The coefficients of upper and lower tail dependence were estimated by the following
equation:
1
λ̂+,− = n oα (3.53)
l̂
max 1, β̂
where constant l was non-parametrically estimated by:
ˆl = FX−1 (u) ∼ Xk,N

lim = , as k → N, 0 (3.54)
u→1− ,0+ FY−1 (u) Yk,N
As we can see already on equation (3.54) and equation (3.47) of Hill’s estimator,
our non-parametric method is fully compatible with negative tails. Sorting return
data in increasing order instead of decreasing order, as it is necessary to calculate tail
dependence in negative tails, yields negative return data in both the index tail and the
asset’s tail. Therefore the fraction in the definition of Hill’s estimator becomes positive
and the natural logarithm gives out a real number. Constant ˆl is accordingly always
positive and if β < 0 for any asset and the index relation (3.53) cannot be applied
since it assumes β > 0 and therefore λ = 0. To check whether constant ˆli are sensitive
to threshold k, I first plotted:
ˆl(k) = Xk,N /Yk,N for k = 1, 2, . . . , 150 for the smaller data set of all lower tales
of the assets with the index. The 150 most extreme return values of the upper tails
correspond to k/N = 6%.
Figure (3.5) shows that ˆl(k) becomes stable after about k/N = 0.5% and remains
within narrow limits up to 6%.
P Xj,N
Using the average value of ˆl(k), ˆl(k) = k1 kj=1 Yj,N on the one hands constitutes in
a shift of emphasis to the extreme tail and on the other hand increases the robustness
of constant ˆl and λ̂ to changes of threshold k, which also makes the necessity of finding
k ∗ , the optimal threshold value, obsolete. Instead it becomes sufficient to determine
an optimal interval, which in our case is: k = 3% . . . 5%. Figure (3.6) shows on the
example of negative tails, because there the effect is particularly strong, that in the
area of the most extreme return values of an asset when k/N → 0, ˆl(k) determined as
average value over k becomes unstable. This could lead to distortion of our estimats.
Pk Xj,N
We can avoid this by calculation of ˆlc (k) = k−c+11
j=Y Yj,N , where we chose an interval
ranging from c = [0.05·N] to k with [·] denoting integer numbers. This can be observed
in figure (3.7). However ˆl(k) seems to be stable on the interval we’re interested in.
To summarize for upper tails: Tail indexes α were calculated by Hill’s estimator ν̂
31
18
BMY
CVX
16 HPQ
KO
14 MMM
PG
SGP
12 TXN
WAG
10
l(k)
0
0 0.01 0.02 0.03 0.04 0.05 0.06
k/N
Figure 3.5: ˆl(k) = Xk,N /Yk,N with k = 1 . . . 150 (k/N = 0% . . . 6%) for the lower tail of
all assets with the index S&P 500 on the smaller data set ranging from January 1991 up to
December 2000.
12
BMY
CVX
HPQ
10 KO
MMM
PG
SGP
8 TXN
WAG
mean
6
l(k)
0
0 0.01 0.02 0.03 0.04 0.05 0.06
k/N
P Xj,N
Figure 3.6: ˆl(k) = k1 kj=1 Yj,N with k = 1 . . . 150 (or k/N = 0% . . . 6%) for the lower tail of
all assets with the index S&P 500 on the smaller data set ranging from January 1991 up to
December 2000.
32
4.5
BMY
CVX
4 HPQ
KO
3.5 MMM
PG
SGP
3 TXN
WAG
mean,c
2.5
l(k)
1.5
0.5
0
0 0.01 0.02 0.03 0.04 0.05 0.06
k/N
Pk Xj,N
Figure 3.7: ˆl(k)c = k−c+11
j=Y Yj,N with k = 13 . . . 150 (or k/N = 0.5% . . . 6%), and c =
[0.05 · N ] ([·] denotes integer numbers) applied to the lower tail of all assets with the index
S&P 500 on the smaller data set ranging from January 1991 up to December 2000.
and Gabaix’s ordinary least squares log-log rank-size tail index estimate b̂γn given by:
X −1
1 k Yj,N
ν̂ = j=1 log (3.55)
k Yk,N
log(Rank(Yj,N ) − 1/2) = a − b̂γn ∗ log(Yj,N ), for j = 1 . . . k, (3.56)
where Y1,N ≥ Y2,N ≥ · · · ≥ YN,N denote the ordered statistics of the sample containing
N realizations of the market return vector Y and threshold number k assumed to
represent the 4% quantile of Y .
Constant ˆl was non-parametrically estimated by:
k
X Xj,N
ˆl(k) = 1 (3.57)
k j=1 Yj,N
k
X Xj,N
ˆlc (k) = 1
(3.58)
k − c + 1 j=c Yj,N
and β̂ was calculated by ordinary least squares regression to the linear factor model:
X = β · Y + ε with X denoting asset returns in descending chronologic order, with Y
denoting corresponding index returns, and with ε denoting idiosyncratic noise.
Putting all these parameters in equation (3.59) for upper tail dependence:
1
λ̂+ = n oν̂ (3.59)
l̂·
max 1, β̂
1
λ̂+ = n ob̂γn (3.60)
max 1, l̂β̂·
33
Non-Par Par
up lo up lo up lo up lo
ν̂ 3.23 3.16 3.23 3.16 3.23 3.16 3.23 3.16
tail 1...k 1...k Y ...k Y ...k 1...k 1...k Y ...k Y ...k
λ̂
BMY 0.06 0.05 0.06 0.07 0.07 0.01 0.07 0.08
CVX 0.02 0.02 0.02 0.02 0.02 0.00 0.02 0.02
HPQ 0.10 0.07 0.10 0.09 0.13 0.02 0.14 0.12
KO 0.06 0.05 0.06 0.07 0.07 0.01 0.08 0.08
MMM 0.04 0.03 0.04 0.04 0.04 0.01 0.04 0.04
PG 0.03 0.02 0.03 0.04 0.03 0.00 0.03 0.04
SGP 0.04 0.04 0.04 0.05 0.05 0.01 0.05 0.06
TXN 0.00* 0.00* 0.00* 0.00* 0.00* 0.00* 0.00* 0.00*
WAG 0.09 0.06 0.09 0.11 0.11 0.01 0.10 0.12
Table 3.8: Estimated values of upper and lower tail dependence for S&P 500 index with
a set of nine major assets traded on the n New oν York stock Exchange calculated by a non-
+,− l
parametric approach: λ̂ = 1/ max 1, β on the left and by a parametric approach:

λ̂+,− = 1/ 1 + β −ν · CCYε on the right. The tail represents the most extreme 4% of the
return values during a time interval from January 1991 to December 2000. ’tail’ shows the
calculation interval of l with c = 13 and k = 100 and ∗ denotes negative β̂.
and applying the approach to our reference data sets yields the estimates reported in
tables (3.8) and (3.10) on the left side using Hill’s estimator ν and reported in tables
(3.9) and (3.11) on the left side using Gabaix’s estimator bγn 5 .
and, for the calculation of Gabaix’s tail index estimator, multiply the ordered sample
by (-1). β̂ remains the same for negative tails, as it is calculated for the whole data
sample within this approach.
3.2.3 Analysis of TDC estimated by the Non-Parametric Approach

Within this subsection I provide a sensitivity analysis of TDC estimated by the non-
parametric approach of Sornette & Malevergne performed on the two reference data
sets: the robustness of the results to the choice of threshold number k is first analyzed
visually by plotting λ̂ in dependence of k. In a second step estimation of error bars by
bootstrap sampling with replacement of λ̂ is provided. The aim is to find confidence
intervals for the estimates and to get an insight into the underlying error distributions.
Then as a third step variations of λ̂ in time are studied by rolling time windows. Dif-
ferent sample sizes are shifted along the time axis in order to measure time dependence
of λ̂.
Figure (3.8) shows λ̂(k) for Nk = 0% . . . 6%, figure (3.9) λ(k) for Nk = 0% . . . 6%,
and (3.10) shows λc (k) for Nk = 0.5% . . . 6% for the lower tail of the smaller data
sample. Results for the positive tail look more stable. But also for negative tails the
charts look consistent and stable. Looking at the interval of Nk = 3% . . . 5% that is of
primary interest to us, the curve of λ is not stiff to moderate changes in k. Using the
5
The matlab m-file for the implementation of λ+,− estimated by the non-parametric approach according to
Sornette & Malevergne is denoted by: lambda np sor ma.m and enclosed to the appendix and the data CD
34
Non-Par Par
b̂γn 3.71 3.37 3.71 3.37 3.71 3.37 3.71 3.37
λ̂
BMY 0.04 0.04 0.04 0.05 0.05 0.00 0.05 0.07
CVX 0.01 0.01 0.01 0.02 0.01 0.00 0.01 0.02
HPQ 0.07 0.06 0.07 0.08 0.10 0.01 0.11 0.11
KO 0.04 0.04 0.04 0.06 0.05 0.00 0.05 0.07
MMM 0.02 0.02 0.02 0.03 0.03 0.00 0.03 0.03
PG 0.02 0.02 0.02 0.03 0.02 0.00 0.02 0.03
SGP 0.03 0.03 0.03 0.04 0.03 0.00 0.03 0.05
TXN 0.00* 0.00* 0.00* 0.00* 0.00* 0.00* 0.00* 0.00*
WAG 0.06 0.05 0.06 0.10 0.08 0.00 0.08 0.11
a set of nine major assets traded on the New York stock Exchange calculated by a non-
n obγn
parametric approach: λ̂+,− = 1/ max 1, βl on the left and by a parametric approach:
γ

λ̂+,− = 1/ 1 + β −bn · CCYε on the right. The tail represents the most extreme 4% of the
return values during a time interval from January 1991 to December 2000. ’tail’ shows the
calculation interval of l with c = 13 and k = 100 and ∗ denotes negative β̂.
Non-Par Par
ν̂ 3.09 3.13 3.09 3.13 3.09 3.13 3.09 3.13
λ̂
BMY 0.05 0.04 0.05 0.05 0.06 0.02 0.06 0.06
CVX 0.04 0.04 0.04 0.04 0.05 0.02 0.05 0.05
HPQ 0.09 0.08 0.09 0.09 0.12 0.07 0.13 0.13
KO 0.10 0.08 0.10 0.11 0.13 0.02 0.13 0.13
MMM 0.06 0.05 0.06 0.06 0.07 0.02 0.07 0.08
PG 0.02 0.02 0.02 0.03 0.03 0.00 0.03 0.03
SGP 0.03 0.02 0.03 0.03 0.03 0.01 0.03 0.03
TXN 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
WAG 0.07 0.06 0.07 0.08 0.09 0.02 0.09 0.09
a set of nine major assets traded on then New oν York stock Exchange calculated by a non-
+,− l
parametric approach: λ̂ = 1/ max 1, β on the left and by a parametric approach:

λ̂+,− = 1/ 1 + β −ν · CCYε on the right. The tail represents the most extreme 4% of the
return values during a time interval from July 1985 to April 2008. ’tail’ shows the calculation
interval of l with c = 29 and k = 229.
35
Non-Par Par
b̂γn 3.56 3.04 3.56 3.04 3.56 3.04 3.56 3.04
λ̂
BMY 0.03 0.05 0.03 0.05 0.04 0.03 0.04 0.07
CVX 0.03 0.04 0.03 0.04 0.03 0.02 0.03 0.05
HPQ 0.06 0.09 0.06 0.10 0.09 0.08 0.10 0.14
KO 0.07 0.09 0.07 0.12 0.10 0.02 0.10 0.14
MMM 0.04 0.05 0.04 0.06 0.05 0.02 0.05 0.08
PG 0.01 0.02 0.01 0.03 0.02 0.01 0.02 0.04
SGP 0.02 0.02 0.02 0.03 0.02 0.01 0.02 0.04
TXN 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
WAG 0.05 0.07 0.05 0.08 0.06 0.03 0.06 0.10
a set of nine major assets traded on the New York stock Exchange calculated by a non-
n obγn
parametric approach: λ̂+,− = 1/ max 1, βl on the left and by a parametric approach:
γ

λ̂+,− = 1/ 1 + β̂ −bn · CCYε on the right. The tail represents the most extreme 4% of the
return values during a time interval from July 1985 to April 2008. ’tail’ shows the calculation
interval of l with c = 29 and k = 229.
uncorrected mean value λ(k), estimates tend to be slightly lower than by choosing the
corrected estimate λc (k). Nevertheless, I think that neglecting most extreme values as
we did by corrected values does not have to yield better estimates because they might
have high impanct on distributions as it is most notable for negative tails. This can be
observed at the example of figure (3.10). Therefore I will give both estimators λ(k) and
λc (k) in the result charts. Significant differences between these two estimators generally
signalise strong impact of outliers, the values that are to a high degree uncommon.
Estimation of Error Bars

For the estimation of error bars or in other words: the level of uncertainty specified
by a particular estimation method, I performed bootstrap sampling with replacement.
The bootstrap method is a procedure that involves choosing random samples with
replacement from a data set and analyzing each sample in the same way. Sampling
with replacement means that every sample is returned to the data set after sampling or
after being chosen. So a particular data point from the original data set could appear
multiple times in a particular bootstrap sample. The number of elements in each
bootstrap sample equals the number of elements in the original data set. The range
of sample estimates obtained enables you to establish the uncertainty of the quantity
you’re estimating.
Considering the linear factor model: X = β·Y +ε, I created bootstrap samples (with
replacement) of the index data table (i.e. S&P 500) and then picked out the respective
data points of the assets (according in time to S&P 500 index data). Like that I only
performed bootstrap sampling of one vector (S&P 500 index data) and searched for
the corresponding asset data by algorithm. ’bootstrp’ is a predefined function handle
in Matlab, which allows one to perform sampling by replacement. β̂, ν̂, and ˆl as the
36
0.14
BMY
CVX
HPQ
0.12
KO
MMM
PG
0.1 SGP
TXN
WAG
0.08
λ(k)
0.06
0.04
0.02
0
0 0.01 0.02 0.03 0.04 0.05 0.06
k/N
1
Figure 3.8: λ̂(k) = n o ν̂ with k = 1 . . . 343 (or k/N = 0% . . . 6%), applied to the lower
max 1, l
β̂
tail of all assets with the index S&P 500 on the bigger data set ranging from July 1985 to
April 2008.
0.08
BMY
CVX
0.07 HPQ
KO
MMM
0.06 PG
SGP
TXN
0.05 WAG
λ(k)mean
0.04
0.03
0.02
0.01
0
0 0.01 0.02 0.03 0.04 0.05 0.06
k/N
1
Figure 3.9: λ(k) = ν̂ with k = 1 . . . 343 (or k/N = 0% . . . 6%), applied to the lower
max 1, l̂
β̂
tail of all assets with the index S&P 500 on the bigger data set ranging from July 1985 to
April 2008.
37
0.12
BMY
CVX
HPQ
0.1 KO
MMM
PG
SGP
0.08 TXN
WAG
λ(k)mean,c
0.06
0.04
0.02
0
0 0.01 0.02 0.03 0.04 0.05 0.06
k/N
1
Figure 3.10: λ(k) = ν̂ with k = 29 . . . 343 (or k/N = 0.5% . . . 6%) and c = [0.005 · N ]
max 1, l̂c
β̂
([·] denotes integer numbers), applied to the lower tail of all assets with the index S&P 500
on the bigger data set ranging from July 1985 to April 2008.
j,NX
mean value of lj = Yj,N for j = 1 . . . k and j = c . . . k with c = 0.005 · N then were
calculated independently for each sample. Table (3.12) shows results of bootstrap
sampling with replacement applied to the smaller data set and (3.13) shows results of
bootstrap sampling with replacement applied to the bigger data sample 6 . The mean
values of the tail dependence coefficients calculated for the 1000 bootstrap samples were
close to the λ̂ of the original sample.
I calculated relative deviations between average of estimated bootstrap sample tail
dependence coefficients and original values (λ of original data sample) of maximally
7%, which can be observed in columns denoted by ’rel err’. The quantiles describe
the width of the error bar or in other words the extent of uncertainty: a 95% quan-
tile for example gives the absolute deviation of 95% of the bootstrap tail dependence
estimates from their mean value. Taking a look at estimated error bars we determine
that standard deviations of the difference between tail dependence coefficient estimates
calculated for the bs = 1000 bootstrap samples most of times are approximately half
of the respective 95% quantiles. This is an indicator for the error distributions to be
asymptitically Gaussian. Furthermore with respect to relative sizes of the quantiles
compared to absolute values of estimators we can detect a certain pattern. Looking at
the smaller sample bootstrap estimates, provided in table (3.12), we observe that most
of the 95% quantiles calculated in the positive tails tend towards 70% to 80% of the
corresponding total values of tail dependence coefficient estimates and for negative tails
95% quantiles are about the size of the total value of corresponding tail dependence
6
The matlab m-file for the bootstrap sampling with replacement of λ+,− estimated by the non-parametric
approach according to Sornette & Malevergne is denoted by: bootstr nonpar alld.m and enclosed to the data
CD
38
coefficient estimates. For the bigger data sample quantiles are significantly smaller.
95% quantiles here are mostly about 50% to 60% of corresponding total value of tail
dependence coefficient estimates in the positive tails and slightly higher in the negative
tails. This shows us that either the only way to improve our λ estimates by the given
approach is to aggregate more data, or that error bars simply depend on the chosen
time window and evolve according an ARCH process (autoregressive conditional het-
eroscedasticity) considering the variance of the current error term to be a function of
the variances of the previous time period’s error terms.
39
m=2507 bs=1000
λbs,mean λbs,mean
λ k=100 rel err max dev 95% q 90% q std bs k=100 rel err max dev 95% q 90% q std bs
BMY 0.06 0.01 0.10 0.04 0.03 0.02 0.04 0.07 0.09 0.04 0.03 0.02
CVX 0.02 0.00 0.04 0.02 0.01 0.01 0.02 0.01 0.05 0.02 0.02 0.01
HPQ 0.10 0.00 0.20 0.07 0.06 0.04 0.07 0.05 0.10 0.06 0.05 0.03
KO 0.06 0.01 0.10 0.04 0.04 0.02 0.05 0.02 0.20 0.06 0.05 0.03
MMM 0.04 0.02 0.10 0.03 0.03 0.02 0.03 0.03 0.07 0.03 0.02 0.02
PG 0.03 0.03 0.10 0.03 0.02 0.01 0.02 0.03 0.08 0.03 0.02 0.02
SGP 0.04 0.01 0.10 0.03 0.02 0.02 0.03 0.05 0.08 0.03 0.03 0.02
TXN 0.00* Inf 0.00 0.00 0.00 0.00 0.00* Inf 0.00 0.00 0.00 0.00
WAG 0.09 0.02 0.20 0.08 0.06 0.04 0.06 0.03 0.20 0.06 0.05 0.03
40
λc
BMY 0.06 0.01 0.08 0.04 0.03 0.02 0.06 0.04 0.10 0.04 0.04 0.02
CVX 0.02 0.00 0.04 0.02 0.01 0.01 0.02 0.03 0.04 0.02 0.02 0.01
HPQ 0.10 0.00 0.20 0.07 0.06 0.04 0.09 0.03 0.20 0.07 0.05 0.04
KO 0.06 0.01 0.08 0.04 0.04 0.02 0.07 0.03 0.10 0.06 0.05 0.03
MMM 0.04 0.02 0.09 0.03 0.03 0.02 0.04 0.02 0.08 0.03 0.03 0.02
PG 0.03 0.04 0.07 0.03 0.02 0.01 0.04 0.00 0.10 0.04 0.03 0.02
SGP 0.04 0.01 0.08 0.03 0.02 0.02 0.05 0.03 0.10 0.04 0.03 0.02
TXN 0.00* Inf 0.00 0.00 0.00 0.00 0.00* Inf 0.00 0.00 0.00 0.00
WAG 0.09 0.02 0.20 0.08 0.06 0.04 0.11 0.03 0.20 0.08 0.07 0.04
Table 3.12: Establishing the uncertainty of non-parametrically estimated upper and lower tail dependence coefficients λ̂ by creating 1000 bootstrap
deviations of the results. The tails represent the most extreme 4% (excluding highest 0.5% for λc ) of the return values during a time interval from
January 1991 to December 2000. β̂j have been calculated on the whole samples.∗ denotes negative β̂ and therefore λ̂ = 0 and ’Inf’ denotes ·/0.
m=5736 bs=1000
λbs,mean λbs,mean
BMY 0.05 0.01 0.06 0.03 0.02 0.01 0.04 0.02 0.08 0.03 0.02 0.01
CVX 0.04 0.01 0.05 0.02 0.02 0.01 0.04 0.05 0.08 0.03 0.03 0.02
HPQ 0.09 0.00 0.07 0.04 0.03 0.02 0.09 0.02 0.12 0.04 0.04 0.02
KO 0.10 0.02 0.10 0.05 0.04 0.03 0.09 0.05 0.15 0.07 0.06 0.04
MMM 0.07 0.03 0.07 0.04 0.03 0.02 0.05 0.06 0.08 0.03 0.03 0.02
PG 0.03 0.20 0.08 0.03 0.02 0.02 0.02 0.10 0.06 0.02 0.02 0.01
SGP 0.03 0.10 0.05 0.03 0.02 0.02 0.02 0.10 0.06 0.02 0.02 0.01
TXN 0.00 0.20 0.00 0.00 0.00 0.00 0.00 0.40 0.01 0.00 0.00 0.00
WAG 0.07 0.00 0.07 0.04 0.03 0.02 0.06 0.03 0.08 0.03 0.03 0.02
41
λc
BMY 0.05 0.01 0.06 0.03 0.02 0.01 0.05 0.03 0.07 0.03 0.02 0.01
CVX 0.04 0.01 0.05 0.02 0.02 0.01 0.04 0.05 0.07 0.03 0.02 0.02
HPQ 0.09 0.00 0.07 0.04 0.03 0.02 0.10 0.03 0.11 0.04 0.03 0.02
KO 0.10 0.01 0.12 0.05 0.04 0.03 0.11 0.02 0.13 0.07 0.06 0.04
MMM 0.07 0.03 0.07 0.04 0.03 0.02 0.06 0.06 0.07 0.03 0.03 0.02
PG 0.03 0.20 0.08 0.03 0.02 0.01 0.03 0.20 0.07 0.03 0.03 0.02
SGP 0.03 0.10 0.05 0.03 0.02 0.01 0.03 0.10 0.08 0.03 0.02 0.01
TXN 0.00 0.20 0.00 0.00 0.00 0.00 0.00 0.30 0.01 0.00 0.00 0.00
WAG 0.07 0.00 0.07 0.04 0.03 0.02 0.08 0.03 0.08 0.04 0.03 0.02
deviations of the results. The tails represent the most extreme 4% (excluding highest 0.5% for λc ) of the return values during a time interval from
July 1985 to April 2008. β̂j have been calculated on the whole samples.
Observation of λ by Rolling Time Window
As mentioned, it is the aim of the determination of tail dependence in terms of port-
folio analysis to find assets with low tail dependence coefficients in order to diversify
away extreme risks. Looking at tables (3.8), (3.10), (3.9), and (3.11) asset Texas
Instruments Inc. is maybe the most interesting case. Depending on the sample size, β̂
becomes either zero, which yields zero tail dependence by default criteria or diminutive,
which yields vanishing tail dependence. The sample size reflects the time window of the
estimate. It would be interesting to determine, how tail dependence estimates evolve
with time. The hypothesis is that λ is not fixed but perhaps is evolving according to an
ARCH process. Therefore I used a rolling time window to observe the time dependence
of the estimate λ. The size of the time window should on the one hand be sufficiently
large to allow for good precision according to the bootstrap procedure and should on
the other hand be sufficiently small to reflect the possible change of values as a func-
tion of time. This had to be tested on different window sizes while I had to keep an
eye on the individual parameters tail index α, β, and l to control whether the window
size or generally the size of the sample allows for appropriate determination. I first
plotted β̂, ˆl, ν̂ in dependence of N for three window sizes: S = 2500, S = 1600, and
S = 800 shown in figures (3.11),. . ., (3.19). X-axis N has the dimension of observation
days (daily observations) starting from N = 1 representing July 1st 1985 and ending
by N = 5736 representing Mars 31st 2008
First of all it is important to take notice of the different plot intervals in N given
the different window sizes. When I chose S = 2500, I have to wait for the first 2500
daily observations to take place, which literally corresponds to a time interval of 2500
days from the first observation. Choosing S = 800 and a step size of one between
successive measurements, indicating that the time window moves one data point to
the right hand side per step (or chronologically one day), means that I already have
2500 − 800 = 1700 measurements at observation day N = 2500, which is the starting
point of measurements by choosing the biggest window size. That’s why at first sight
the plots look kind of different.
Looking at figures (3.11), (3.12), and (3.13) for the three window sizes S, we observe
that the behavior of β̂ looks consistent over time. The plots for different window sizes
only differ in detailedness of the mapping of changes. The smaller we go, the bigger the
peaks become. The same counts for constant ˆl, which is shown in figures (3.14), (3.15),
and (3.16) for the different window sizes. Sample peaks in ˆl sometimes are smoothed
out extensively when we use bigger window sizes S. This makes ˆl look very stable over
time when we plot it by choosing window size S = 2500. As furthermore observable for
most of the assets, β̂, after having reached a peak, seems to have a declining tendency
over time. The only asset that is completely incompatible with the declining trend
of β̂ is Texas Instruments Inc.(TXN). It reflects on the others by showing a counter-
trend. Asset TXN indicates a overall counter-movement with the index S&P 500 in the
early phases indicated by negative β̂ and recently a co-movement with the index, as β̂
becomes positive or even close to one. The trend shown by the other assets would be
the opposite of this: decreasing overall co movement of assets and index with increasing
time.
Looking at figures (3.17), (3.18), and (3.19) of ν̂ for the three window sizes, esti-
mates oscillate strongly but withing stable intervals depending on the window size. We
know that Hill’s estimator performs better with bigger data sets. Therefore it is sug-
gestive to choose a window size, such that upper and lower bounds of these oscillations
remain small enough. This is the case for samples with S >1000.
42
BMY CVX HPQ
1 0.8 1.4
0.9 0.7
1.3
0.8 0.6
1.2
β
β
0.7 0.5
1.1
0.6 0.4
0.5 1
2500 3000 3500 4000 4500 5000 5500 6000 2500 3000 3500 4000 4500 5000 5500 6000 2500 3000 3500 4000 4500 5000 5500 6000
N N N
KO MMM PG
1.4 0.9 1
1.2
0.8 0.8
1
0.7 0.6
β
β
0.8
0.6 0.4
0.6
0.4 0.5 0.2

2500 3000 3500 4000 4500 5000 5500 6000 2500 3000 3500 4000 4500 5000 5500 6000 2500 3000 3500 4000 4500 5000 5500 6000
N N N
SGP TXN WAG
1 0.8 1.4
0.9 0.6 1.2
0.8 0.4 1
β
β
0.7 0.2 0.8
0.6 0 0.6
0.5 −0.2 0.4

2500 3000 3500 4000 4500 5000 5500 6000 2500 3000 3500 4000 4500 5000 5500 6000 2500 3000 3500 4000 4500 5000 5500 6000
N N N
Figure 3.11: β(N ) estimated for 9 assets X and index S&P 500 Y using the linear single
factor model: X = β · Y + ε for rolling time horizon windows of S = 2500 considered data
points from N = (1 . . . S), (2 . . . S + 1), . . . , (5736 − S + 1 . . . 5736) or a total time interval from
July 1985 to Mars 2008.
BMY CVX HPQ
1 0.8 1.6
0.9 0.7
1.4
0.8
0.6
0.7 1.2
β
0.5
0.6
1
0.5 0.4
0.4 0.8
1000 2000 3000 4000 5000 6000 1000 2000 3000 4000 5000 6000 1000 2000 3000 4000 5000 6000
N N N
KO MMM PG
1.2 0.9 1
1 0.8
0.8
0.8 0.7
0.6
β
0.6 0.6
0.4
0.4 0.5
0.2 0.4 0.2

1000 2000 3000 4000 5000 6000 1000 2000 3000 4000 5000 6000 1000 2000 3000 4000 5000 6000
N N N
SGP TXN WAG
1.2 1.5 1.4
1 1.2
1
0.8 1
0.5
β
0.6 0.8
0
0.4 0.6
0.2 −0.5 0.4

1000 2000 3000 4000 5000 6000 1000 2000 3000 4000 5000 6000 1000 2000 3000 4000 5000 6000
N N N
43
BMY CVX HPQ
1.4 1 2
1.2 0.8
1.5
1 0.6
β
β
0.8 0.4
1
0.6 0.2
0.4 0 0.5
0 1000 2000 3000 4000 5000 6000 0 1000 2000 3000 4000 5000 6000 0 1000 2000 3000 4000 5000 6000
N N N
KO MMM PG
1.2 1 1
1 0.9 0.8
0.8
0.8 0.6
0.7
β
β
0.6 0.4
0.6
0.4 0.5 0.2
0.2 0.4 0
0 1000 2000 3000 4000 5000 6000 0 1000 2000 3000 4000 5000 6000 0 1000 2000 3000 4000 5000 6000
N N N
SGP TXN WAG
1.5 1.5 1.5
1
1 1
0.5
β
β
0.5 0.5
0
0 −0.5 0
0 1000 2000 3000 4000 5000 6000 0 1000 2000 3000 4000 5000 6000 0 1000 2000 3000 4000 5000 6000
N N N
BMY CVX HPQ
2.4 2.8
1.9
2.2 1.8 2.6
1.7
2 1.6 2.4
l
1.5
1.8 1.4 2.2
1.3
1.6 2
2500 3000 3500 4000 4500 5000 5500 6000 2500 3000 3500 4000 4500 5000 5500 6000 2500 3000 3500 4000 4500 5000 5500 6000
N N N
KO MMM PG
1.8 2.2
1.9
1.7 2
1.8
1.7 1.6 1.8
1.6
l
1.5 1.5 1.6
1.4
1.4 1.4
1.3
1.3
2500 3000 3500 4000 4500 5000 5500 6000 2500 3000 3500 4000 4500 5000 5500 6000 2500 3000 3500 4000 4500 5000 5500 6000
N N N
SGP TXN WAG
2.8 4 2.6
2.6 2.4
3.5
2.4 2.2
l
2.2 2
3
2 1.8
1.8 2.5 1.6

2500 3000 3500 4000 4500 5000 5500 6000 2500 3000 3500 4000 4500 5000 5500 6000 2500 3000 3500 4000 4500 5000 5500 6000
N N N
Figure 3.14: Constant lU (N ) for upper tails plotted in green and constant lL (N ) for
lower tails plotted in black estimated for 9 assets and index S&P 500 using relation:
ˆl(k) = 1 Pk Xj,S /Yj,S with k = 0.04 · S, Xj,S and Yj,S rank ordered return observa-
k j=1
tions, and rolling time horizon window of S = 2500 considered data points from N =
(1 . . . S), (2 . . . S + 1), . . . , (5736 − S + 1 . . . 5736) or a total time interval from July 1985 to
Mars 2008.
44
BMY CVX HPQ
2.6 2.5 3.5
2.4
3
2
2.2
2.5
l
2
1.5
2
1.8
1.6 1 1.5
1000 2000 3000 4000 5000 6000 1000 2000 3000 4000 5000 6000 1000 2000 3000 4000 5000 6000
N N N
KO MMM PG
3 2.5 2.5
2.5 2
2
2 1.5
l
l
1.5
1.5 1
1 1 0.5
1000 2000 3000 4000 5000 6000 1000 2000 3000 4000 5000 6000 1000 2000 3000 4000 5000 6000
N N N
SGP TXN WAG
3 4.5 3
2.8 4
2.5
2.6
3.5
2.4 2
l
l
3
2.2
1.5
2 2.5
1.8 2 1
1000 2000 3000 4000 5000 6000 1000 2000 3000 4000 5000 6000 1000 2000 3000 4000 5000 6000
N N N
Figure 3.15: Constant lU (N ) for upper tails plotted in green and constant lL (N ) for lower tails
P
plotted in black estimated for 9 assets and index S&P 500 using: ˆl(k) = k1 kj=1 Xj,S /Yj,S with
k = 0.04 · S, Xj,S and Yj,S rank ordered return observations, and rolling time horizon window
of S = 1600 considered data points from N = (1 . . . S), (2 . . . S + 1), . . . , (5736 − S + 1 . . . 5736)
or a total time interval from July 1985 to Mars 2008.
BMY CVX HPQ

3 3.5 4.5
3 4
2.5
2.5 3.5
2 2 3
l
1.5 2.5
1.5
1 2
1 0.5 1.5
0 1000 2000 3000 4000 5000 6000 0 1000 2000 3000 4000 5000 6000 0 1000 2000 3000 4000 5000 6000
N N N
KO MMM PG
3 3.5 3.5
2.5 3 3
2.5 2.5
2
2 2
l
1.5
1.5 1.5
1 1 1
0.5 0.5 0.5

0 1000 2000 3000 4000 5000 6000 0 1000 2000 3000 4000 5000 6000 0 1000 2000 3000 4000 5000 6000
N N N
SGP TXN WAG
4 6 3.5
3.5 5 3
3 4 2.5
l
2.5 3 2
2 2 1.5
1.5 1 1
0 1000 2000 3000 4000 5000 6000 0 1000 2000 3000 4000 5000 6000 0 1000 2000 3000 4000 5000 6000
N N N
Figure 3.16: Constant lU (N ) for upper tails plotted in green and constant lL (N ) for lower tails
P
plotted in black estimated for 9 assets and index S&P 500 using: ˆl(k) = k1 kj=1 Xj,S /Yj,S with
k = 0.04 · S, Xj,S and Yj,S rank ordered return observations, and rolling time horizon window
45
4
νU
νL
3.5
S&P 500
ν
2.5
2500 3000 3500 4000 4500 5000 5500 6000
N
Figure 3.17: νk,U (N ) for upper tail of index S&P 500 plotted in red and νk,L (N ) for lower tail
−1
1 Pk Yj,S
plotted in black using Hill’s estimator given by equation ν̂ = k j=1 log Yk,N with k =
0.04 · S and Xj,S and Yj,S rank ordered return observations for rolling time horizon windows
5
ν
U
ν
L
4.5
4
S&P 500
3.5
ν
2.5
2
1500 2000 2500 3000 3500 4000 4500 5000 5500 6000
N
−1
1 Pk Yj,S
46
8
νU
ν
L
5
S&P 500
ν
1
0 1000 2000 3000 4000 5000 6000
N
−1
1 Pk Yj,S
Figures (3.20), (3.21), and (3.22) show plots of λ̂U and λ̂L for the different assets
and for the three different window sizes. What most of these plots have in common is
that upper tail dependence estimates λ̂U show an increasingly constant behavior over
time and lower tail dependence estimates λ̂L overall show a decreasing tendency, which
is more distinctive for window sizes with S >1000. Figures (3.23) and (3.24) show tail
dependence estimated for rolling windows of the three different sizes altogether in the
same figure and for the same range. It can be observed that tail dependence estimates
for the different window sizes sometimes seem inconsistent with each other. It is not
only because the plots with wider window sizes look smoothed, but also that some
peaks, which are distinctive in red (S = 800) don’t even appear in blue (S = 1600) or
black (S = 2500). This counts first of all for more recent estimates. The three assets
Chevron Corp.(CVX), 3M Co.(MMM), and Texas Instruments Inc.(TXN) show a peak
in the upper tail dependence at the end of the measurement period N >5000. The only
asset that is very much contradictory with overall trends is again TXN, what makes it
particularly interesting.
Although it is difficult to draw conclusions because of the inconsistency of the es-
timates obtained by the different window sizes, something is clearly apparent in all of
the plots: Whereas lower tail dependence λ̂L in the beginning used to dominate over
upper tail dependence λ̂U , by some point typically around N = 4000 λ̂U becomes bigger
than λ̂L . This is very interesting because it would mean that the tendency of extreme
positive co-movement between the assets and index S&P 500 has become stronger than
the tendency of extreme negative co-movements or in other words: extraordinary high
gains of assets and index S&P 500 are more likely to happen simultaneously than it is
the case that high losses of assets and index S&P 500 occur at the same time.
47
BMY CVX HPQ
0.12 0.08 0.2
0.1
0.06 0.15
0.08
0.06 0.04 0.1

λ
λ
0.04
0.02 0.05
0.02
0 0 0
2500 3000 3500 4000 4500 5000 5500 6000 2500 3000 3500 4000 4500 5000 5500 6000 2500 3000 3500 4000 4500 5000 5500 6000
N N N
KO MMM PG
0.4 0.12 0.12
0.1 0.1
0.3
0.08 0.08
0.2 0.06 0.06

λ
λ
0.04 0.04
0.1
0.02 0.02
48
0 0 0
2500 3000 3500 4000 4500 5000 5500 6000 2500 3000 3500 4000 4500 5000 5500 6000 2500 3000 3500 4000 4500 5000 5500 6000
N N N
SGP −3
x 10 TXN WAG
0.08 8 0.2
0.06 6 0.15
0.04 4 0.1
λ
λ
0.02 2 0.05
0 0 0
2500 3000 3500 4000 4500 5000 5500 6000 2500 3000 3500 4000 4500 5000 5500 6000 2500 3000 3500 4000 4500 5000 5500 6000
N N N
Figure 3.20: λU (N ) for the upper tails of index S&P 500 and the nine assets plotted in blue and λL (N ) for the lower tails plotted in red using
n oν̂
non-parametric approach given by equation λ̂+,− = 1/ max 1, βl with coefficients ν̂, l and β for rolling time horizon windows of S = 2500
considered data points from N = (1 . . . S), (2 . . . S + 1), . . . , (5736 − S + 1 . . . 5736) or a total time interval from July 1985 to Mars 2008.
BMY CVX HPQ
0.2 0.2 0.2
0.15 0.15 0.15
0.1 0.1 0.1

λ
λ
0.05 0.05 0.05
0 0 0
1000 2000 3000 4000 5000 6000 1000 2000 3000 4000 5000 6000 1000 2000 3000 4000 5000 6000
N N N
KO MMM PG
0.4 0.2 0.2
0.3 0.15 0.15
0.2 0.1 0.1

λ
λ
0.1 0.05 0.05
49
0 0 0
1000 2000 3000 4000 5000 6000 1000 2000 3000 4000 5000 6000 1000 2000 3000 4000 5000 6000
N N N
SGP TXN WAG
0.12 0.06 0.25
0.1 0.05 0.2

0.08 0.04
0.15
0.06 0.03
λ
λ
0.1
0.04 0.02
0.02 0.01 0.05
0 0 0
1000 2000 3000 4000 5000 6000 1000 2000 3000 4000 5000 6000 1000 2000 3000 4000 5000 6000
N N N
n oν̂
BMY CVX HPQ
0.2 0.25 0.4
0.2
0.15 0.3
0.15
0.1 0.2
λ
λ
0.1
0.05 0.1
0.05
0 0 0
0 1000 2000 3000 4000 5000 6000 0 1000 2000 3000 4000 5000 6000 0 1000 2000 3000 4000 5000 6000
N N N
KO MMM PG
0.8 0.25 0.25
0.2 0.2
0.6
0.15 0.15
0.4
λ
λ
0.1 0.1
0.2
0.05 0.05
50
0 0 0
0 1000 2000 3000 4000 5000 6000 0 1000 2000 3000 4000 5000 6000 0 1000 2000 3000 4000 5000 6000
N N N
SGP TXN WAG
0.2 0.1 0.4
0.08
0.15 0.3
0.06
0.1 0.2
λ
λ
0.04
0.05 0.1
0.02
0 0 0
0 1000 2000 3000 4000 5000 6000 0 1000 2000 3000 4000 5000 6000 0 1000 2000 3000 4000 5000 6000
N N N
n oν̂
BMY CVX HPQ
0.12 0.25 0.2
0.1 0.2
0.15
0.08
0.15
0.06 0.1
λ
λ
0.1
0.04
0.05
0.02 0.05
0 0 0
2500 3000 3500 4000 4500 5000 5500 6000 2500 3000 3500 4000 4500 5000 5500 6000 2500 3000 3500 4000 4500 5000 5500 6000
N N N
KO MMM PG
0.25 0.2 0.12
0.2 0.1
0.15
0.08
0.15
0.1 0.06
λ
λ
0.1
0.04
0.05
0.05 0.02
51
0 0 0
2500 3000 3500 4000 4500 5000 5500 6000 2500 3000 3500 4000 4500 5000 5500 6000 2500 3000 3500 4000 4500 5000 5500 6000
N N N
SGP TXN WAG
0.12 0.08 0.4
0.1
0.06 0.3
0.08
0.06 0.04 0.2

λ
λ
0.04
0.02 0.1
0.02
0 0 0
2500 3000 3500 4000 4500 5000 5500 6000 2500 3000 3500 4000 4500 5000 5500 6000 2500 3000 3500 4000 4500 5000 5500 6000
N N N
Figure 3.23: λU (N ) for the upper tails of index S&P 500 and the nine assets for rolling time horizon windows of size S = 2500 plotted in black,
n oν̂
S = 1600 plotted in blue, and S = 800 plotted in red using non-parametric approach given by equation λ̂+,− = 1/ max 1, βl with coefficients
ν̂, l and β from N = (2501 − S . . . S), (2502 . . . S + 1), . . . , (5736 − S + 1 . . . 5736).
BMY CVX HPQ
0.2 0.25 0.2
0.2
0.15 0.15
0.15
0.1 0.1
λ
λ
0.1
0.05 0.05
0.05
0 0 0
2500 3000 3500 4000 4500 5000 5500 6000 2500 3000 3500 4000 4500 5000 5500 6000 2500 3000 3500 4000 4500 5000 5500 6000
N N N
KO MMM PG
0.4 0.12 0.25
0.1 0.2
0.3
0.08
0.15
0.2 0.06
λ
λ
0.1
0.04
0.1
0.02 0.05
52
0 0 0
2500 3000 3500 4000 4500 5000 5500 6000 2500 3000 3500 4000 4500 5000 5500 6000 2500 3000 3500 4000 4500 5000 5500 6000
N N N
SGP TXN WAG
0.2 0.1 0.4
0.08
0.15 0.3
0.06
0.1 0.2
λ
λ
0.04
0.05 0.1
0.02
0 0 0
2500 3000 3500 4000 4500 5000 5500 6000 2500 3000 3500 4000 4500 5000 5500 6000 2500 3000 3500 4000 4500 5000 5500 6000
N N N
Figure 3.24: λL (N ) for the lower tails of index S&P 500 and the nine assets for rolling time horizon windows of size S = 2500 plotted in black,
n oν̂
S = 1600 plotted in blue, and S = 800 plotted in red using non-parametric approach given by equation λ̂+,− = 1/ max 1, βl with coefficients
ν̂, l and β from N = (2501 − S . . . S), (2502 . . . S + 1), . . . , (5736 − S + 1 . . . 5736).
Error Bars in Dependence of Time
To establish uncertainty of estimated upper and lower tail dependence I performed
bootstrap sampling over the whole area: N = (1 . . . S), (2 . . . (S + 1)), . . . , (5736 − S +
1 . . . 5736) for the nine assets with index S&P 500 and all of the 3 window sizes 7 .
Time order of the results is given top down. That means that the latest estimate is
on top representing Mars 31st , 2008. For the biggest window size of S = 2500 daily
observations I calculated bs = 800 bootstrap sample per window and for each of the
two smaller ones S = 1600 and S = 800 I calculated bs = 1000 bootstrap samples.
As step size between the successive windows I choose five days. That means that the
window moves five daily observations to the right per step considering the time axis
(or five days into the future). This provides the window with five new observations per
step, meanwhile it ignores the five oldest ones. As it can be observed in the Excel files,
this makes [(5736 − 2500)/5] = 647 windows for the biggest window size S = 2500 data
points, 827 windows for samples of window size S = 1600, and 987 windows for the
smallest window size S = 800.
In terms of quantile estimates on the bootstrap samples in order to estimate error
bars, bootstrap estimates of the biggest window size S = 2500 should theoretically yield
similar results as obtained by bootstrap sampling of our smaller reference data set that
ranges from January 1991 to December 2000 and consists of 2506 daily observations.
In fact quantiles and standard deviations of the bootstrap estimates are in very good
accordance with these further results given in table (3.12), whereas for upper tails on
average 95% quantiles between 70% and 80% of the corresponding total values of tail
dependence coefficient estimates were calculated and for lower tails 95% quantiles were
about the size of the total values (100% of corresponding tail dependence coefficient
estimates). Choosing a window size of S = 2500 yields average 95% quantiles of 70%
up to 85% of the tail dependence estimates bs L np k up m (notation explained below)
for positive tails and around 80% to 150% of corresponding bs L np k lo m for negative
tails. Choosing corrected ˆl, quantiles calculated for negative tails become lower.
Here again the assumption of error distributions to be approximately Gaussian seems to
hold well, as calculated standard deviations within and between the different bootstrap
samples are very close of being equal to half of 95% quantiles. This counts for all
window sizes. Looking at the smallest window size of S = 800 daily observations,
95% quantiles on average tend to be 150% to 200% of corresponding tail dependence
coefficient estimates for positive tails and up to 250% for negative tails. This means
that standard deviations are around the size of the estimates, which is after my opinion
too high. In between we have window size S = 1600 with average 95% quantiles of
100% to 140% of corresponding tail dependence estimates for positive tails and 120%
to 180% of corresponding tail dependence estimates for negative tails. This reveals
that sample sizes shouldn’t be smaller than S = 1600 to achieve at least more or less
accurate estimates.
In the following list explanatory notes on the results of bootstrap sampling for the rolling
window tail dependence estimations attached in Excel files provided at the example of
non-parametric tail dependence estimates for upper tails and uncorrected ˆl:
bs L np k up m: mean value of the bootstrap tail dependence estimators λ̂U by non-
parametric approach calculated for each individual window consisting of bs sam-
ples and all of the nine assets given from left to right in the following order:
BMY, CVX, HPQ, KO, MMM, PG, SGP, TXN, WAG. ’k’ means that ˆl were
7
Results are on the data CD submitted with the thesis in the folder: window results
53
estimated for the whole threshold k given by X1,N ≥ X2,N ≥ · · · ≥ Xk,N and
Y1,N ≥ Y2,N ≥ · · · ≥ Yk,N with k = 0.04 · N and . . . y . . . means that ˆl were
estimated for the corrected threshold from Xc,N ≥ Xc+1,N ≥ · · · ≥ Xk,N and
Yc,N ≥ Yc+1,N ≥ · · · ≥ Yk,N with k = 0.04 · N and c = [0.05 · k] where [·] denotes
integer numbers.
rel 99k up: value of 99% quantile divided by bs L np k up m shows the magnitude
of the quantile relative to the absolute average estimate. To obtain the absolute
value of the quantile one simply multiplies the quantile by bs L np k up m.
For 95% quantiles I additionally calculated mean values over time and bootstrap devi-
ations over time (shown below data sets on Excel sheets).
Overall the deviation estimates of the rolling time windows look consistent along the
time axis. But first of all with respect to negative tails there are certain fluctuations
in the quantile estimates in time. Therefore the time series were checked for serial
correlation. This is shown at the example of a return series of index S&P 500 for an
interval from January 1950 to April 2008 with a total of N = 14654 data points plotted
over time in figure (3.25). It seems that large and small changes are clustered together.
To confirm this, autocorrelation proposed by Box & Jenkins [16] (1994) for different
lags is plotted in figure (3.26) for returns and squared returns 8 . There seems to be no
autocorrelation in the return series itself but the squarred returns exhibit significant
autocorrelation at least up to lag 5. Since the squared returns measure the second
order moment of the original time series, this result indicates that the variance of S&P
500 conditional on its past history may change over time, or that the time series may
exhibit time varying conditional heteroskedasticity or volatility clustering. The serial
correlation in squared returns, or conditional heteroskedasticity, can be expressed using
an autoregressive process for squared residuals i.e. by the autoregressive conditional
heteroscedasticity ARCH model of Engle [17] (1982) usually referred to as the ARCH(p)
model given by:
Yt = c + εt (3.61)
p
X
2
σt = α0 + αj · ε2t−j where α0 > 0, αj ≥ 0 (3.62)
j=1
Yt denote a stationary time series such as financial returns and is expressed by its mean
c and iid Gaussian white noise εt with mean zero. p denotes the length of ARCH lags
(number of time steps considered). Since εt has zero mean, Vart−1 (ε) = Et−1 (ε2 ) = σt2 ,
the above equation can be rewritten as:
p
X
ε2t = α0 + αj · ε2t−j + ut (3.63)
j=1
8
Autocorrelation denotes the correlation of a variable with itself over successive time intervals defined by:
P N −k
(Yi −Y )·(Yi+k −Y )
rk = i=1 P N 2 with successive measurements Y1 , . . . , YN and lag k
i=1 (Yi −Y )
54
S&P 500 Daily Returns
0.1
0.05
−0.05
Return
−0.1
−0.15
−0.2
−0.25
Jan 1950 Jan 1969 Jan 1988 Apr 2008
Figure 3.25: Return data for index S&P 500 ranging from January 1950 to April 2008
where ut = ε2t − Et−q (ε2t ) is a zero mean white noise process.

To check the hypothesis that λ evolves according an ARCH process I applied Engle’s
test [17] (1982) for the presence of ARCH effects to my historical day-to-day return
time series. ’archtest’ is a predefined function handle in Matlab, which allows one to
test for autocorrelation of univariate time series. Since an ARCH model can be written
as an AR (autoregressive) model in terms of squared residuals as in equation (3.63),
a Lagrange Multiplier (LM) test for ARCH effects can be constructed based on the
auxiliary regression (3.63). Under the null hypothesis that there are no ARCH effects:
α1 = α2 = . . . = αp = 0, the test statistic follows a χ2 distribution with p degrees of
freedom:
LM = T · R2 ∼ χ2 (p), (3.64)
where T is the sample size and R2 is computed from the regression (3.63) using es-
timated residuals 9 . The alternative hypothesis is that, in the presence of ARCH
components, at least one of the estimated α coefficients must be significantly different
from zero. Generally spoken if (T · R2 ) is greater than the χ2 table value, we reject the
null hypothesis and conclude there are ARCH effects. If (T · R2 ) is smaller than the
χ2 value, we accept the null hypothesis assuming there are no ARCH effects. These
explainations are drawn on Ziwot & Wang [18] (2007). They based their explainations
on S-Plus, which is a statistics software similar to Matlab.
Test statistics at the example of index S&P 500 for an interval from January 1950
to April 2008 with a total of N = 14654 is given in table (3.14). The results show
significant evidence in support of GARCH effects for all the three lags.
p: size of lags
9
We refer to Engle [17] (1982) for details
55
ACF with Bounds for Raw Return Series ACF of the Squared Returns
0.8 0.8
0.6 0.6
Sample Autocorrelation
Sample Autocorrelation
0.4 0.4
0.2 0.2
0 0
−0.2 −0.2
0 5 10 15 20 0 5 10 15 20
Lag Lag
Figure 3.26: Autocorrelation for a return series on the left and for a squared return series on
the right of index S&P 500 ranging from January 1950 to April 2008
H: Boolean decision variable: 0 indicates acceptance of null hypothesis that no ARCH

effects exist; i.e. there is no heteroskedasticity at the corresponding length of lags.
1 indicates rejection of the null hypothesis.
P-Value: P-values (significance levels) at which the ARCH test rejects the null hy-
pothesis of no existing ARCH effects
ARCH Test Stat: ARCH test statistics for each number of lags equal to (T · R2 ) with
T denoting the sample size and R2 computed from the regression (3.63) using
estimated residuals
Critical Value: critical values of the χ2 distribution for comparison with the corre-
sponding ARCH test statistics
p H P-Value ARCH Test Stat. Critical Value

10 1 0 805 18
15 1 0 815 25
20 1 0 824 31
Table 3.14: ARCH statistics applied to daily S&P 500 index return data for an interval
ranging from January 1950 to April 2008 and for lags of q = 10, 15, and 20
As we can see on the example of index S&P 500 for the chosen time interval, the p-value
is zero for all of the three lags, which is smaller than the conventional 5% rejection level,
so we reject the null hypothesis that there are no ARCH effects.
56
3.2.4 Implementation of the Parametric Approach
Now I come to the Implementation of the parametric approach by Sornette & Malev-
ergne. This approach assumes that in the extreme tails the survival distributions
functions of asset returns X and the corresponding residues ε, assumed as idiosyn-
cratic noise independent of index returns Y and given by the linear factor model:
X = β · Y + ε, can be approximated by power-laws given by: P r{X > x} ∼ C · x−α ,
which constitutes the parametrization.
Considering N sorted realizations of return vector Y and residual vector ε with
Y1,N ≥ Y2,N ≥ · · · ≥ YN,N and ε1,N ≥ ε2,N ≥ · · · ≥ εN,N , the coefficient of tail
dependence is given as function of the ratio of the scale factors:
k
CˆY = · (Yk,N )α , as k → N, 0 (3.65)
N
k
Ĉε = · (εk,N )α , as k → N, 0 (3.66)
N
as:
1 1
λ̂ = = α , for k → N, 0 (3.67)
Ĉε ε̂k,N
1 + β̂ −α · Ĉy 1+ β̂·Yk,N
where ε and β are estimated in a least squares sense. If β < 0 for any asset relation,
relation (3.67) cannot be applied, since it assumes β > 0 and therefore λ̂ = 0.
We can check whether the scale factors Ĉ can be consistently estimated given a
certain threshold k by plotting ĈY and Ĉε for the nine assets in dependence of k using
Hill’s estimator ν̂ and Gabaix’s estimator bˆγn . Figure (3.27) shows ĈY (k) and Ĉε (k) for
k=1, 2,. . . , 458 (this constitutes the interval k/N = 0% . . . 8% of the bigger data set)
calculated by Hill’s estimator, and figure (3.28) shows ĈY (k) and Ĉε (k) for k=1, 2,. . . ,
458 calculated by Gabaix’s estimator, both for the upper tails of the bigger data set.
Both plots show robust behaviour in the range of 3 to 5%.
To provide a coefficient that is independent of the choice of the tail coefficient, I also
1/α 1/α
Ĉε (k) εk,N Ĉε (k)
plotted: Ĉ (k) = Yk,N . Figure (3.29) shows Ĉ (k) for k=1, 2,. . . , 458 also
Y Y
for the upper tails of the bigger data set. All these plots show that asset TXN (Texas
Instruments Inc.) seems to show somewhat a different behavior than the other assets
and the index.
Also for the parametric approach, in order to put emphasis on the extreme tails and
in order to increase robustness of ĈY and Ĉε and hence of tail dependence coefficients
P
λ̂ to changes of threshold k, I used the average values of ĈY , Ĉ Y = k1 kj=1 Ĉy,j in
P
dependence of k and the average value of Ĉε , Ĉ ε = k1 kj=1 Ĉε,j in dependence of k.
Figure (3.30) shows on the example of the positive tails of the bigger sample that
1/α
Ĉ ε
for the nine assets is stable in k for Nk = 3% . . . 5%.
Ĉ Y
Figure (3.28) shows that for small k/N values of ĈY and Ĉε could be comparatively
1/α
Ĉ ε (k)
large, which also has a certain, even though weaker effect on . To avoid
Ĉ Y (k)
distortion of our results it might be better to exclude the most extreme values (k →
0, N) in order to estimate the mean of the scale factors of the power law distributions.
1
Pk 1
Pk
Therefore we calculate Ĉ Y,c = k−c+1 j=c Ĉ Y,j and Ĉ ε,c = k−c+1 j=c Ĉε,j with c =
[0.05 · k] where [·] denotes integer numbers.
57
−6
x 10
6
S&P 500
BMY
CVX
5 HPQ
KO
MMM
PG
4 SGP
TXN
WAG
ε
C ,C
3
Y
0
0 0.01 0.02 0.03 0.04 0.05 0.06 0.07 0.08
k/N
Figure 3.27: Scale factors ĈY (k) = Nk · (Yk,N )ν̂ of the index S&P 500 and Ĉε(k) = Nk · (εk,N )ν̂
of the nine assets’ residues plotted for the upper tails of the bigger data set ranging from July
1985 to April 2008 with k=1, 2,. . . , 458 (k/N = 0% . . . 8%).
−6
x 10
2
S&P 500
1.8 BMY
CVX
HPQ
1.6 KO
MMM
1.4 PG
SGP
TXN
1.2 WAG
ε
C ,C
1
Y
0.8
0.6
0.4
0.2
0
0 0.01 0.02 0.03 0.04 0.05 0.06 0.07 0.08
k/N
bˆγ
Figure 3.28: Scale factors ĈY (k) = Nk · (Yk,N ) n of the index S&P 500 and Ĉε(k) = Nk · (εk,N )bn
ˆγ
of the nine assets’ residues plotted for the upper tails of the bigger data set ranging from July
1985 to April 2008 with k=1, 2,. . . , 458 (k/N = 0% . . . 8%).
58
3.5
BMY
CVX
HPQ
KO
3 MMM
PG
SGP
TXN
WAG
2.5
(C /C )1/α
ε Y
1.5
1
0 0.01 0.02 0.03 0.04 0.05 0.06 0.07 0.08
k/N
1/α
ε
Figure 3.29: Fraction of scale factors Ĉε (k) = Yk,N of the nine assets’ residues and the
ĈY (k) k,N
index S&P 500, plotted for the upper tails of the bigger data set ranging from July 1985 to
April 2008 with k=1, 2,. . . , 458 (k/N = 0% . . . 8%).
3.5
BMY
CVX
HPQ
KO
3 MMM
PG
SGP
TXN
)1/α
WAG
2.5
Y,mean
/C
ε,mean
2
(C
1.5
1
0 0.01 0.02 0.03 0.04 0.05 0.06 0.07 0.08
k/N
1/α
Ĉ ε
Figure 3.30: Fraction of scale factors of the nine assets’ residues and the index S&P
Ĉ Y
500, plotted for the upper tails of the bigger data set ranging from July 1985 to April 2008
with k=1, 2,. . . , 458 (k/N = 0% . . . 8%).
59
In general it is an advantage to follow a parametric approach, if the assumed para-
metric form of the distributions is not too far from the true one. We can check this
visually by comparing the empirical complementary cumulative distribution functions
F i,empirical = Nk for k/N = 0% . . . 4% with the parametric complementary cumulative
distribution functions F i,parametric = C· · x−α of the tails. Figure (3.31) shows the two
functions in dependence of return values for the upper tails of the bigger sample of εi
for all assets using Hill’s estimator and Ĉε for (k/N = 4%) and figure (3.32) using
Ĉ ε,c the mean value of Ĉε (k) for k/N = 0.5% . . . 4%. Figure (3.33) and figure (3.34)
show the same functions using Gabaix’s estimator. Results are consistent and show
that by building the mean values of constants C the parametrization becomes more
precise independent of the tail index estimator we chose. Anyway, it is difficult to say
in general, which tail index estimator works better. Therefore it makes sense to still
calculate both for comparison.
60
BMY CVX HPQ
0.03 0.03 0.03

Fpar,Femp
emp
Fpar,Femp
,F
0.02 0.02 0.02
par
F
0.01 0.01 0.01
0 0 0
0.03 0.04 0.05 0.06 0.025 0.03 0.035 0.04 0.045 0.04 0.05 0.06 0.07 0.08
returns returns returns
KO MMM PG
0.03 0.03 0.03

Fpar,Femp
emp
Fpar,Femp
,F
0.02 0.02 0.02
par
F
0.01 0.01 0.01
61
0 0 0
0.025 0.03 0.035 0.04 0.045 0.025 0.03 0.035 0.04 0.045 0.025 0.03 0.035 0.04 0.045
SGP TXN WAG
0.03 0.03 0.03

Fpar,Femp
emp
Fpar,Femp
,F
0.02 0.02 0.02

par
F
0.01 0.01 0.01
0 0 0
0.04 0.05 0.06 0.07 0.06 0.07 0.08 0.09 0.1 0.11 0.03 0.035 0.04 0.045 0.05 0.055
Figure 3.31: Empirical complementary cumulative distribution functions F ε,empirical = Nk plotted in red and parametric complementary cumulative
distribution functions F ε,parametric = Ĉε · ε−ν̂ with Ĉε for (k/N = 4%) plotted in black for k/N = 4% . . . 0% (from left to right) in dependence of
returns for the upper tails of the nine assets.
BMY CVX HPQ
0.04
0.03 0.04
0.03
Fpar,Femp
emp
Fpar,Femp
0.03
0.02
,F
0.02
par
0.02
F
0.01 0.01
0.01
0 0 0
0.03 0.04 0.05 0.06 0.025 0.03 0.035 0.04 0.045 0.04 0.05 0.06 0.07 0.08
KO MMM PG
0.04 0.04
0.03
0.03 0.03
Fpar,Femp
emp
Fpar,Femp
0.02
,F
0.02 0.02
par
F
0.01 0.01 0.01
62
0 0 0
0.025 0.03 0.035 0.04 0.045 0.025 0.03 0.035 0.04 0.045 0.025 0.03 0.035 0.04 0.045
SGP TXN WAG
0.04 0.04
0.03
0.03 0.03
Fpar,Femp
emp
Fpar,Femp
0.02
,F
0.02 0.02
par
F
0.01 0.01 0.01
0 0 0
0.04 0.05 0.06 0.07 0.06 0.07 0.08 0.09 0.1 0.11 0.03 0.035 0.04 0.045 0.05 0.055
Figure 3.32: Empirical complementary cumulative distribution functions F ε,empirical = Nk plotted in red and parametric complementary cumulative
1 Pk
distribution functions F ε,parametric = Ĉ ε,c · ε−ν̂ with Ĉ ε,c = k−c j=c Ĉε for c = 0.005 · N plotted in black for k/N = 4% . . . 0% (from left to right)
in dependence of returns for the upper tails of the nine assets.
BMY CVX HPQ
0.03 0.03 0.03

Fpar,Femp
emp
Fpar,Femp
,F
0.02 0.02 0.02
par
F
0.01 0.01 0.01
0 0 0
0.03 0.04 0.05 0.06 0.025 0.03 0.035 0.04 0.045 0.04 0.05 0.06 0.07 0.08
KO MMM PG
0.03 0.03 0.03

Fpar,Femp
emp
Fpar,Femp
,F
0.02 0.02 0.02
par
F
0.01 0.01 0.01
63
0 0 0
0.025 0.03 0.035 0.04 0.045 0.025 0.03 0.035 0.04 0.045 0.025 0.03 0.035 0.04 0.045
SGP TXN WAG
0.03 0.03 0.03

Fpar,Femp
emp
Fpar,Femp
,F
0.02 0.02 0.02

par
F
0.01 0.01 0.01
0 0 0
0.04 0.05 0.06 0.07 0.06 0.07 0.08 0.09 0.1 0.11 0.03 0.035 0.04 0.045 0.05 0.055
Figure 3.33: Empirical complementary cumulative distribution functions F εi ,empirical = Nk plotted in green and parametric complementary cumu-
γ
lative distribution functions F ε,parametric = Ĉε · ε−b̂n with Ĉε for (k/N = 4%) plotted in black for the upper tails of k/N = 4% . . . 0% in dependence
of returns for the nine assets.
BMY CVX HPQ
0.04
0.04
0.03 0.04
Fpar,Femp
emp
Fpar,Femp
0.03
,F
0.02
par
0.02
0.02
F
0.01 0.01
0 0 0
0.03 0.04 0.05 0.06 0.025 0.03 0.035 0.04 0.045 0.04 0.05 0.06 0.07 0.08
KO MMM PG
0.04
0.04 0.04
0.03
Fpar,Femp
emp
Fpar,Femp
0.03 0.03
,F
0.02 0.02
par
0.02
F
0.01 0.01 0.01
64
0 0 0
0.025 0.03 0.035 0.04 0.045 0.025 0.03 0.035 0.04 0.045 0.025 0.03 0.035 0.04 0.045
SGP TXN WAG
0.04
0.04 0.04
0.03
Fpar,Femp
emp
Fpar,Femp
0.03
,F
0.02
par
0.02 0.02
F
0.01 0.01
0 0 0
0.04 0.05 0.06 0.07 0.06 0.07 0.08 0.09 0.1 0.11 0.03 0.035 0.04 0.045 0.05 0.055
Figure 3.34: Empirical complementary cumulative distribution functions F εi ,empirical = Nk plotted in green and parametric complementary cumula-
γ
1 Pk
tive distribution functions F ε,parametric = Ĉ ε,c · ε−b̂n with Ĉ ε,c = k−c j=c Ĉε for c = 0.005 · N plotted in black for k/N = 4% . . . 0% in dependence
of returns for the upper tails of the nine assets.
To summarize for upper tails: tail indexes α were calculated by Hill’s estimator ν̂
and Gabaix’s OLS log-log rank-size tail index estimate b̂γn given by:
X −1
1 k Yj,N
ν̂ = j=1 log (3.68)
k Yk,N
log(Rank(Yj,N ) − 1/2) = a − b̂γn · log(Yj,N ), for j = 1 . . . k (3.69)
where Y1,N ≥ Y2,N ≥ · · · ≥ YN,N denote ordered statistics of the sample consisting of
N realizations of the market return vector Y and threshold k is assumed to represent
the 4% quantile of Y .
β and idiosyncratic noise ε were calculated by ordinary least squares regression to
the linear factor model: X = β · Y + ε with X denoting asset returns in descending
chronologic order, and with Y denoting corresponding index returns.
Constants ĈY and Ĉε were parametrically estimated by:
k
1X j
Ĉ Y = · (Yj,N )α (3.70)
k j=1 N
X j k
1
Ĉ Y,c = · (Yj,N )α (3.71)
k − c + 1 j=c N
and
k
1X j
Ĉ ε = · (εj,N )α (3.72)
k j=1 N
X j k
1
Ĉ ε,c = · (εj,N )α (3.73)
k − c + 1 j=c N
considering N sorted realizations of index return vector Y and residual vector ε denoted
by Y1,N ≥ Y2,N ≥ · · · ≥ YN,N and ε1,N ≥ ε2,N ≥ · · · ≥ εN,N .
Putting all these parameters in equation (3.74) for upper tail dependence:
1
λ̂+ = (3.74)
Ĉε
1 + β̂ −ν̂ · ĈY
1
λ̂+ = γ
(3.75)
Ĉε
1 + β̂ −b̂n · ĈY
and applying the approach to our reference data sets yields the estimates reported in
tables (3.8) and (3.10) on the left side using Hill’s estimator ν and reported in tables
(3.9) and (3.11) on the left side using Gabaix’s estimator bγn 10 .
and multiply all of the ordered samples by (-1). β and ε remains the same for negative
tails, as it is calculated for the whole data sample within this approach.
10
The matlab m-file for the implementation of λ+,− estimated by the parametric approach according to
Sornette & Malevergne is denoted by: lambda par sor ma.m and enclosed to the appendix and the data CD
65
0.16
BMY
CVX
0.14 HPQ
KO
MMM
0.12 PG
SGP
TXN
0.1 WAG
λ(k)
0.08
0.06
0.04
0.02
0
0 0.01 0.02 0.03 0.04 0.05 0.06 0.07 0.08
k/N
1
Figure 3.35: λ̂ = Cε with k = 1 . . . 458 (or k/N = 0% . . . 8%), applied to the lower tails
1+β̂ −ν̂ · C
y
of all assets with the index S&P 500 on the bigger data set ranging from July 1985 to April
2008.
3.2.5 Analysis of TDC estimated by the Parametric Approach

Also for the parametric approach by Sornette & Malevergne I provide a sensitivity
analysis of TDC estimates performed on the two reference data sets: the robustness
of the results to the choice of threshold k is first analyzed visually by plotting λ̂ in
dependence of k. In a second step estimation of error bars of λ̂ is provided by bootstrap
sampling with replacement. The aim is to find confidence intervals for the estimates
and to get an insight into the underlying error distributions.
Figure (3.35) shows λ̂(k) for Nk = 0% . . . 8%, figure (3.36) λ(k) for Nk = 0% . . . 8%,
and figure (3.37) shows λc (k) for Nk = 0.5% . . . 8% for the lower tail of the smaller data
sample. Results of estimators for positive tails look less fluctuating because in positive
tails outliers are less extreme. For the parametric approach also counts that on the
interval: Nk = 3% . . . 5%, that is of primary interest to us, the curve of λ is not stiff to
moderate changes in k. Using the uncorrected mean value λ(k), estimates tend to be
slightly lower than by choosing the corrected estimate λc (k), which means neglecting
most extreme outliers.
The results of the bootstrap sampling are shown in table (3.15) for the smaller sam-
ple and in table (3.16) for the bigger sample 11 . bs denotes the number of samples, which
has been set to thousand for both sample sizes and N shows the number of daily ob-
servations of the samples. The procedure is exactly the same as for the non-parametric
approach. Especially conspicuous is the column of relative errors in the uncorrected
negative tail calculated for the smaller sample and located in thePupper right parts of
table (3.15). ’rel err’ are calculated as follows: |λoriginal − 1/bs · bs
j=1 λj |/λoriginal . An
explanation for this could be that extreme outliers, as already discussed at the example
of the non-parametric approach, have an even higher stake in terms of distorting tail
11
The matlab m-file for the bootstrap sampling with replacement of λ+,− estimated by the parametric
approach according to Sornette & Malevergne is denoted by: bootstr par alld.m and enclosed to the data CD
66
0.1
BMY
0.09 CVX
HPQ
KO
0.08 MMM
PG
0.07 SGP
TXN
WAG
0.06
λ(k)mean
0.05
0.04
0.03
0.02
0.01
0
0 0.01 0.02 0.03 0.04 0.05 0.06 0.07 0.08
k/N
1
Figure 3.36: λ = with k = 1 . . . 458 (or k/N = 0% . . . 8%), applied to the lower tails
1+β̂ −ν̂ · Ĉ ε
Ĉ y
of all assets with the index S&P 500 on the bigger data set ranging from July 1985 to April
2008.
0.14
BMY
CVX
HPQ
0.12
KO
MMM
PG
0.1 SGP
TXN
WAG
0.08
λ(k)mean,c
0.06
0.04
0.02
0
0 0.01 0.02 0.03 0.04 0.05 0.06 0.07 0.08
k/N
1
Figure 3.37: λ = Ĉ ε,c
with k = 29 . . . 458 (or k/N = 0.5% . . . 8%), and c = [0.005 · N ]
1+β̂ −ν̂ ·
Ĉ y,c
([·] denotes integer numbers) applied to the lower tails of all assets with the index S&P 500
on the bigger data set ranging from July 1985 to April 2008.
67
dependence estimates in the parametric approach. If we correct for these most extreme
outliers results become accurate. To have a clear advantage by using a parametric
approximation, a certain amount of data is needed to determine the coefficients with
satisfying accuracy. This amount might be higher than for a non-parametric approach.
Looking at the relative errors of the bigger sample we see that relative errors are
much lower compared to the smaller sample. We can check how the parametrization
works for the lower tail of the smaller sample by comparing the empirical complemen-
tary cumulative distribution functions F i,empirical = Nk for k/N = 0% . . . 4% with the
parametric complementary cumulative distribution functions F i,parametric = C· ∗ x−α
of the tails. Figure (3.38) shows the two functions in dependence of absolute return
values for the lower tails of the smaller sample of εi for all assets using Hill’s estimator
and Ĉ ε the mean value of Ĉε (k) for k/N = 0% . . . 4% and figure (3.39) using Hill’s
estimator and Ĉ ε,c the mean value of Ĉε (k) for k/N = 0.5% . . . 4%.
Comparing the two plots shows that the extraordinary high outliers in the nega-
tive tails of our data samples in connection with a sample size that seems to be less
than the critical or necessary size indeed seems to distort the approximation of the
complementary cumulative distribution function in the region of k/N ≈ 4%. Look-
ing at figure (3.39) we can detect that in the domain of k/N → 0 in most cases
F εi ,parametric = Ĉ ε,c · ε−ν̂ seems to overestimate F εi ,empirical = k/N. To see this more
clearly we can plot the complementary cumulative distribution functions on a log-
arithmic scale to the base ten. Figures (3.40) and (3.41) show the semi-log plots
corresponding to figures (3.38) and (3.39). As we can observe on the semi-log plots
the uncorrected parametric complementary cumulative distribution functions perform
better in the area k/N → 0 and the corrected parametric complementary cumulative
distribution functions perform better in the area k/N → 4%. This is intuitively clear
because if we do not correct for the most extreme outliers we shift the emphasis of
the parametrization towards these most extreme outliers. This shows the limitations
of our parametrization approach but anyway only poses a problem in the negative tails
because of the extraordinary outliers we find there. Because of the fact that both ap-
proaches have a domain where they dominate, it still makes sense to calculate both of
them first of all for negative tails.
Anyway, for the non-parametric approach sample sizes should be chosen around the
size of the bigger reference data sample that consists of 5736 data points to achieve
satisfying accuracy. In spite of relative errors the magnitude of quantile and standard
deviation estimates relative to the total tail dependence estimates is comparable to
estimates by the non-parametric approach.
Because we need very high sample sizes here to obtain trustworthy results and be-
cause it has been shown that for bigger sample sizes there is a loss of significant peaks, I
think that the non-parametric approach is better to analyze tail dependence estimates
in dependence of time. Therefore I don’t go into observations of λ by rolling time win-
dows within this approach. Error bars are of similar extent as for the non-parametric
approach but the procedure seems to request more data to provide accurate results.
68
m=2507 bs=1000
λbs,mean λbs,mean
BMY 0.07 0.01 0.12 0.04 0.04 0.02 0.02 0.90 0.10 0.06 0.04 0.03
CVX 0.02 0.01 0.04 0.02 0.02 0.01 0.01 1.60 0.10 0.03 0.02 0.01
HPQ 0.13 0.02 0.20 0.08 0.07 0.04 0.03 0.50 0.20 0.08 0.05 0.04
KO 0.07 0.01 0.10 0.06 0.05 0.03 0.02 2.00 0.20 0.09 0.07 0.04
MMM 0.04 0.01 0.09 0.03 0.03 0.02 0.02 0.90 0.09 0.04 0.03 0.02
PG 0.03 0.02 0.05 0.03 0.02 0.02 0.01 1.40 0.09 0.02 0.01 0.01
SGP 0.05 0.01 0.07 0.04 0.03 0.02 0.01 0.90 0.10 0.04 0.02 0.02
TXN 0.00 Inf 0.00 0.00 0.00 0.00 0.00* Inf 0.00 0.00 0.00 0.00
WAG 0.11 0.00 0.15 0.08 0.06 0.04 0.01 0.90 0.20 0.05 0.02 0.02
69
λc
BMY 0.07 0.01 0.20 0.04 0.04 0.02 0.08 0.03 0.13 0.05 0.05 0.03
CVX 0.02 0.01 0.06 0.02 0.02 0.01 0.02 0.01 0.08 0.03 0.02 0.01
HPQ 0.13 0.02 0.20 0.08 0.07 0.04 0.12 0.04 0.19 0.07 0.06 0.04
KO 0.08 0.02 0.10 0.05 0.05 0.03 0.08 0.02 0.13 0.06 0.05 0.03
MMM 0.04 0.01 0.08 0.03 0.03 0.02 0.04 0.00 0.10 0.04 0.03 0.02
PG 0.03 0.02 0.09 0.03 0.02 0.02 0.04 0.02 0.10 0.04 0.03 0.02
SGP 0.05 0.01 0.09 0.04 0.03 0.02 0.06 0.02 0.09 0.05 0.04 0.02
TXN 0.00 Inf 0.01 0.00 0.00 0.00 0.00* inf 0.02 0.00 0.00 0.00
WAG 0.10 0.00 0.10 0.07 0.06 0.04 0.12 0.02 0.20 0.08 0.07 0.04
Table 3.15: Establishing the uncertainty of parametrically estimated upper and lower tail dependence coefficients λ̂ by creating 1000 bootstrap
samples of historical return data tables for S&P 500 index and corresponding asset returns and calculation of quantiles, extreme values, and
standard deviations of the results. The tails represent the most extreme 4% (excluding highest 0.5% for λc ) of the return values during a time
interval from January 1991 to December 2000. β̂j have been calculated on the whole samples.∗ denotes negative β̂ and therefore λ̂ = 0 and ’Inf’
denotes ·/0.
m=5736 bs=1000
λbs,mean λbs,mean
BMY 0.06 0.01 0.06 0.03 0.03 0.02 0.03 0.40 0.08 0.04 0.03 0.02
CVX 0.05 0.00 0.05 0.03 0.02 0.01 0.02 0.50 0.09 0.04 0.03 0.02
HPQ 0.12 0.00 0.08 0.05 0.04 0.03 0.08 0.10 0.10 0.07 0.06 0.04
KO 0.13 0.02 0.10 0.06 0.05 0.03 0.03 1.10 0.30 0.09 0.05 0.04
MMM 0.08 0.02 0.10 0.04 0.04 0.02 0.03 0.80 0.20 0.06 0.04 0.03
PG 0.03 0.10 0.06 0.03 0.03 0.02 0.01 1.00 0.07 0.02 0.01 0.01
SGP 0.03 0.10 0.06 0.03 0.03 0.02 0.01 0.60 0.08 0.02 0.01 0.01
TXN 0.00 0.30 0.01 0.00 0.00 0.00 0.00 0.80 0.01 0.00 0.00 0.00
WAG 0.09 0.09 0.07 0.04 0.04 0.02 0.03 0.50 0.08 0.03 0.03 0.02
70
λc
BMY 0.06 0.01 0.05 0.03 0.03 0.02 0.07 0.04 0.06 0.03 0.03 0.02
CVX 0.05 0.00 0.05 0.03 0.02 0.01 0.05 0.05 0.07 0.04 0.03 0.02
HPQ 0.13 0.00 0.08 0.05 0.04 0.03 0.13 0.02 0.09 0.05 0.04 0.03
KO 0.13 0.01 0.10 0.06 0.05 0.03 0.14 0.02 0.10 0.07 0.06 0.04
MMM 0.08 0.02 0.09 0.04 0.04 0.02 0.08 0.05 0.10 0.04 0.04 0.02
PG 0.03 0.10 0.06 0.03 0.03 0.02 0.04 0.10 0.09 0.04 0.03 0.02
SGP 0.03 0.10 0.06 0.03 0.03 0.02 0.04 0.10 0.06 0.03 0.03 0.02
TXN 0.00 0.20 0.01 0.00 0.00 0.00 0.00 0.40 0.01 0.00 0.00 0.00
WAG 0.09 0.01 0.07 0.04 0.03 0.02 0.10 0.02 0.08 0.04 0.04 0.02
Table 3.16: Establishing the uncertainty of of parametrically estimated upper and lower tail dependence coefficients λ̂ by creating 1000 bootstrap
interval from July 1985 to April 2008. β̂j have been calculated on the whole samples.
BMY CVX HPQ
0.4 0.2 0.4
Fpar,Femp 0.3 0.15 0.3
Fpar,Femp
Fpar,Femp
0.2 0.1 0.2
0.1 0.05 0.1
0 0 0
0 0.2 0.4 0.6 0.8 0 0.2 0.4 0.6 0.8 0 0.2 0.4 0.6 0.8
KO MMM PG
0.8 0.4 0.8
0.6 0.3 0.6

Fpar,Femp
Fpar,Femp
Fpar,Femp
0.4 0.2 0.4
0.2 0.1 0.2

71
0 0 0
0 0.2 0.4 0.6 0.8 0 0.2 0.4 0.6 0.8 0 0.2 0.4 0.6 0.8
SGP TXN WAG
0.8 0.2 1
0.6 0.15
Fpar,Femp
Fpar,Femp
Fpar,Femp
0.4 0.1 0.5
0.2 0.05
0 0 0
0 0.2 0.4 0.6 0.8 0 0.2 0.4 0.6 0.8 0 0.2 0.4 0.6 0.8
Figure 3.38: Empirical complementary cumulative distribution functions F εi ,empirical = Nk plotted in red and parametric complementary cumulative
P
distribution functions F ε,parametric = Ĉ ε · ε−ν̂ with Ĉ ε = k1 kj=1 Ĉε plotted in black for k/N = 4% . . . 0% (from left to right) in dependence of
returns for the lower tails of the nine assets for a time interval ranging from January 1991 to December 2000.
BMY CVX HPQ
0.06 0.04 0.06
0.03
Fpar,Femp
emp
Fpar,Femp
0.04 0.04
,F
0.02
par
0.02 0.02
F
0.01
0 0 0
0 0.2 0.4 0.6 0.8 0 0.2 0.4 0.6 0.8 0 0.2 0.4 0.6 0.8
KO MMM PG
0.06 0.06 0.06
Fpar,Femp
emp
Fpar,Femp
0.04 0.04 0.04
,F
par
0.02 0.02 0.02
F
72
0 0 0
0 0.2 0.4 0.6 0.8 0 0.2 0.4 0.6 0.8 0 0.2 0.4 0.6 0.8
SGP TXN WAG
0.06 0.06 0.06
Fpar,Femp
emp
Fpar,Femp
0.04 0.04 0.04
,F
par
0.02 0.02 0.02

F
0 0 0
0 0.2 0.4 0.6 0.8 0 0.2 0.4 0.6 0.8 0 0.2 0.4 0.6 0.8
1 Pk
distribution functions F εi ,parametric = Ĉ ε, c · ε−ν̂ with Ĉ ε,c = k−c j=c Ĉε for c = 0.005 · N plotted in black for k/N = 4% . . . 0% (from left to right)
in dependence of returns for the lower tails of the nine assets for a time interval ranging from January 1991 to December 2000.
0
BMY 0
CVX 0
HPQ
10 10 10
−2
Fpar,Femp
emp
Fpar,Femp
10
,F
par
−4
10
F
−5 −6 −5
10 10 10
0 0.2 0.4 0.6 0.8 0 0.2 0.4 0.6 0.8 0 0.2 0.4 0.6 0.8
0
KO 0
MMM 0
PG
10 10 10
Fpar,Femp
emp
Fpar,Femp
−5
,F
10
par
F
73
−5 −10 −5
10 10 10
0 0.2 0.4 0.6 0.8 0 0.2 0.4 0.6 0.8 0 0.2 0.4 0.6 0.8
0
SGP 0
TXN 0
WAG
10 10 10
Fpar,Femp
emp
Fpar,Femp
,F
par
F
−5 −5 −5
10 10 10
0 0.2 0.4 0.6 0.8 0 0.2 0.4 0.6 0.8 0 0.2 0.4 0.6 0.8
P
distribution functions F ε,parametric = Ĉ ε · ε−ν̂ with Ĉ ε = k1 kj=1 Ĉε plotted in black for k/N = 4% . . . 0% in dependence of returns for the lower
tails of the nine assets for a time interval ranging from January 1991 to December 2000.
0
BMY 0
CVX 0
HPQ
10 10 10
−2 −2
Fpar,Femp
emp
Fpar,Femp
10 10
−5
,F
10
par
−4 −4
10 10
F
−6 −10 −6
10 10 10
0 0.2 0.4 0.6 0.8 0 0.2 0.4 0.6 0.8 0 0.2 0.4 0.6 0.8
0
KO 0
MMM 0
PG
10 10 10
Fpar,Femp
emp
Fpar,Femp
−5 −5 −5
,F
10 10 10
par
F
74
−10 −10 −10

10 10 10
0 0.2 0.4 0.6 0.8 0 0.2 0.4 0.6 0.8 0 0.2 0.4 0.6 0.8
0
SGP 0
TXN 0
WAG
10 10 10
Fpar,Femp
emp
Fpar,Femp
−5 −5
,F
10 10
par
F
−10 −5 −10
10 10 10
0 0.2 0.4 0.6 0.8 0 0.2 0.4 0.6 0.8 0 0.2 0.4 0.6 0.8
1 Pk
distribution functions F εi ,parametric = Ĉ ε, c · ε−ν̂ with Ĉ ε,c = k−c j=c Ĉε for c = 0.005 · N plotted in black for k/N = 4% . . . 0% in dependence of
returns for the lower tails of the nine assets for a time interval ranging from January 1991 to December 2000.
3.3 β-Smile Improvement
As an addition to my Sornette & Malevergne approaches, where the regression coeffi-
cient β of the components of vector Y on its corresponding components of vector X
was determined by the least squares method applying a linear additive single factor
model to the whole return data samples of a given time interval given by:
X = β ·Y +ε (3.76)
with ε denoting the vector of error terms, a simple improvement was proposed. Consid-
ering that the linear factor model given by equation (3.76) only holds for components
X and Y large enough on a certain condition, typically when both X and correspond-
ing Y belong to the extreme tails of their probability density distributions, which by
assumption denotes the most extreme 4 % of the return data samples. β̂SI is then
calculated only for extreme tail data in dependence of threshold value k. There are
basically four possible conditions for the calculation of β̂SI of the upper tails 12 :
1st condition : Y ≥ Y (k) ∩ X ≥ X(k)
2nd condition : Y ≥ Y (k)
3rd condition : X ≥ X(k)
4th condition : Y ≥ Y (k) ∪ X ≥ X(k)
The first condition is to calculate β by only considering return values, where X and Y
belong to the most extreme 4% of the sample, the second and the third conditions are
to calculate β by either considering Y large enough or X large enough. As a fourth
condition I wanted to use the Boolean ’or’ (∪) as an extension to the first condition given
by Boolean ’and’ (∩). Table (3.17) shows relative deviations between tail dependence
coefficient estimates calculated using β of the whole data sample and tail dependence
coefficient estimates that were calculated using β̂SI applying the first, second, or third
condition. The fourth condition yields β < 0 and therefor zero tail dependence for all
the nine assets.
In terms of implementation, we just have to build vectors of data that fulfill the
chosen condition and then calculate β̂SI (smile improvement) with this data. The
other coefficients are calculated in the same way as described in section (3.4.2), where
the implementation of the non-parametric approach was discussed.
What we can observe in table (3.17) is that the first condition: Y ≥ Y (k)∩X ≥ X(k)
seems to fit best or at least yields values that are closer to my classic β approach than
the two other conditions. Anyway for some assets the second condition: Y ≥ Y (k)
yields estimates, which are more accurate than estimated by the first condition in
terms of being consistent with the classic β approach. Therefor I decided to further
analyze the first and the second condition. Table (3.18) shows results of β̂SI calculated
by first and second SI condition in comparison to results of β̂ calculated by all data and
results of λ̂+,− calculated by the first and second SI conditions in comparison to results
of λ̂+,− with β̂ calculated by all data for the smaller data set and table (3.19) shows
the same for the bigger data set 13 . Tail indexes were calculated by Hill’s estimator ν̂.
12
I will describe the procedure only on the example of upper tails. For β̂SI of the lower tails the same
relation hold using absolute values of return data.
13
The matlab m-file for the implementation of λ+,− estimated by the non-parametric approach according
to Sornette & Malevergne with β̂ calculated by SI conditions is denoted by: Lambda np SI.m and enclosed to
the data CD
75
condition {X ≥ X(k)} ∩ X ≥ X(k) Y ≥ Y (k) {X ≥ X(k)} ∩ X ≥ X(k) Y ≥ Y (k)
{Y ≥ Y (k)} {Y ≥ Y (k)}
m=2507
ν 3.23 3.23 3.23 3.16 3.16 3.16
λ k=100 k=100 k=100 k=100 k=100 k=100
BMY 0.27 0.96 0.19 0.92 1.00* 2.78
CVX 1.00* 1.00* 0.93 0.73 1.00* 2.06
HPQ 1.00 1.00* 0.33 1.00* 1.00* 0.10
KO 0.86 0.99 0.68 0.21 1.00* 1.36
MMM 1.00* 1.00* 0.91 0.20 0.97 7.76
PG 9.11 0.95 0.96 0.35 1.00* 2.38
SGP 0.26 0.93 0.32 0.97 1.00* 1.91
TXN Inf Inf NaN* NaN* NaN* NaN*
WAG 0.32 0.96 0.79 1.00* 0.85 0.33
m=5736
ν 3.09 3.09 3.09 3.13 3.13 3.13
λ k=229 k=229 k=229 k=229 k=229 k=229
BMY 1.26 0.99 1.00* 0.88 1.00 0.54
CVX 1.17 1.00* 1.00* 0.24 1.00* 0.82
HPQ 0.68 1.00 0.81 0.90 1.00 0.60
KO 8.78 0.79 0.09 1.93 1.00* 3.35
MMM 0.06 0.98 1.00 1.00 1.00* 0.77
PG 1.74 1.00* 1.00* 19.58 1.00* 1.00*
SGP 0.93 1.00* 1.00* 0.27 1.00* 1.00*
TXN 93.63 0.70 1.00* 0.96 1.00* 1.00*
WAG 0.39 1.00* 0.81 0.94 0.91 0.69
Table 3.17: Relative deviations between coefficients of upper and lower tail dependence esti-
mated by the non-parametric approach of Sornette & Malevergne using β̂ calculated for the
whole sample and β̂SI calculated for the tail according to three different conditions for index
S&P 500 and the nine assets. The tail represents the most extreme 4 % of data during a
smaller time interval ranging from January 1991 to December 2000 (k = 100) and during a
bigger time interval ranging from July 1985 to Mars 2008 (k = 229). * denotes zero values of
tail dependence calculated by β̂SI , ’NaN’ denotes 0/0, and ’inf’ denotes ·/0.
76
+ −
β βSI βSI λ+ λ+SI λ+
SI λ− λ−SI λ−
SI
ν 3.23 3.23 3.23
3.16 3.16 3.16

condition all data X
≥ X(k) ∩ X
≥ X(k) ∩ 1...k Y ≥ Y (k) X
≥ X(k) ∩ 1...k Y ≥ Y (k) X
≥ X(k) ∩
m=2507 Y ≥ Y (k) Y ≥ Y (k) Y ≥ Y (k) Y ≥ Y (k)
BMY 0.82 0.74 0.37 0.06 0.07 0.04 0.05 0.18 0.00
CVX 0.45 0.02 0.30 0.02 0.00 0.00 0.02 0.06 0.01
HPQ 1.10 0.22 -0.16 0.10 0.13 0.00 0.07 0.06 0*
KO 0.69 0.38 0.64 0.06 0.02 0.01 0.05 0.12 0.04
MMM 0.55 -0.18 0.51 0.04 0.00 0.00* 0.03 0.26 0.02
PG 0.58 1.20 0.50 0.03 0.00 0.30 0.02 0.07 0.01
SGP 0.85 0.78 0.29 0.04 0.03 0.03 0.04 0.10 0.00
TXN -0.09 5.10 -0.65 0.00* 0.00* 1.00 0.00* 0.00 0.00*
WAG 0.97 1.10 -0.35 0.09 0.16 0.12
0.06 0.04 0*
condition all data Y ≥ Y (k) Y ≥ Y (k) c...k Y ≥ Y (k) X ≥ X(k) ∩ c...k Y ≥ Y (k) X
≥ X(k) ∩
77

m=2507 Y ≥ Y (k) Y ≥ Y (k)
BMY 0.82 0.87 1.20 0.06 0.07 0.04 0.07 0.25 0.01
CVX 0.45 0.20 0.64 0.02 0.00 0.00 0.02 0.07 0.01
HPQ 1.10 1.30 1.10 0.10 0.13 0.00 0.09 0.09 0.00*
KO 0.69 0.48 0.91 0.06 0.02 0.01 0.07 0.17 0.06
MMM 0.55 0.26 1.10 0.04 0.00 0.00* 0.04 0.31 0.03
PG 0.58 0.22 0.85 0.03 0.00 0.30 0.04 0.13 0.03
SGP 0.85 0.76 1.20 0.04 0.03 0.03 0.05 0.15 0.00
TXN -0.09 -1.40 -0.10 0.00* 0.00* 1.00 0.00* 0.00 0.00*
WAG 0.97 1.20 0.86 0.09 0.16 0.12 0.11 0.07 0.00*
Table 3.18: Results for β̂SI using the first SI condition: Y ≥ Y (k) ∩ X ≥ X(k) and the second SI condition: Y ≥ Y (k) for upper and lower tails
calculated by least squares method applied on linear additive single factor model: X = β · Y + ε and for resulting upper and lower tail dependence
coefficients λˆ+ and λˆ− with corrected ˆl (c . . . k) and uncorrected ˆl (1 . . . k). The tail represents the most extreme 4% of data during a time interval
ranging from January 1991 to December 2000 (k = 100, c = 13). * denotes β̂ < 0 → λ = 0.
+ −
β βSI βSI λ+ λ+SI λ+
SI λ− λ−SI λ−
SI
ν 3.09 3.09 3.09
3.13 3.13 3.13

condition all data X
≥ X(k) ∩ X
≥ X(k) ∩ 1...k Y ≥ Y (k) X
≥ X(k) ∩ 1...k Y ≥ Y (k) X
≥ X(k) ∩
m=5736 Y ≥ Y (k) Y ≥ Y (k) Y ≥ Y (k) Y ≥ Y (k)
BMY 0.69 0.90 0.35 0.05 0.00* 0.12 0.04 0.02 0.00
CVX 0.51 0.66 0.47 0.04 0.00* 0.09 0.04 0.07 0.03
HPQ 1.10 0.74 0.51 0.09 0.02 0.03 0.08 0.03 0.01
KO 0.70 1.60 0.98 0.10 0.09 1.00 0.08 0.36 0.24
MMM 0.58 0.56 0.09 0.06 0.00 0.06 0.05 0.01 0.00
PG 0.44 0.61 1.20 0.02 0.00* 0.07 0.02 0.00* 0.39
SGP 0.64 0.27 0.58 0.03 0.00 0.00 0.02 0.00* 0.01
TXN 0.30 1.30 0.10 0.00 0.00* 0.08 0.00 0.00 0.00
WAG 0.77 0.85 0.31 0.07 0.01 0.10
0.06 0.02 0.00

condition all data Y ≥ Y (k) Y ≥ Y (k) c...k Y ≥ Y (k) X ≥ X(k) ∩ c...k Y ≥ Y (k) X ≥ X(k) ∩
78

m=5736 Y ≥ Y (k) Y ≥ Y (k)
BMY 0.69 -0.10 0.54 0.05 0.00* 0.12 0.05 0.02 0.01
CVX 0.51 -0.61 0.62 0.04 0.00* 0.09 0.04 0.07 0.03
HPQ 1.10 0.62 0.79 0.09 0.02 0.03 0.09 0.04 0.01
KO 0.70 0.68 1.10 0.10 0.09 1.00 0.11 0.48 0.32
MMM 0.58 0.10 0.36 0.06 0.00 0.06 0.06 0.01 0.00
PG 0.44 -0.17 -0.06 0.02 0.00* 0.06 0.03 0.00* 0.57
SGP 0.64 0.01 -0.11 0.03 0.00 0.00 0.03 0.00* 0.02
TXN 0.30 -0.41 0.09 0.00 0.00* 0.08 0.00 0.00 0.00
WAG 0.77 0.45 0.53 0.07 0.01 0.10 0.08 0.02 0.00
Table 3.19: Results for β̂SI using the first SI condition: Y ≥ Y (k) ∩ X ≥ X(k) and the second SI condition: Y ≥ Y (k) for upper and lower tails
calculated by least squares method applied on linear additive single factor model: X = β · Y + ε and for resulting upper and lower tail dependence
coefficients λˆ+ and λˆ− with corrected ˆl (c . . . k) and uncorrected ˆl (1 . . . k). The tail represents the most extreme 4% of data during a time interval
ranging from July 1985 to Mars 2008 (k = 229, c = 29). * denotes β̂ < 0 → λ = 0.
I also implemented the β-smile improvement to the estimation of tail dependence
by the parametric approach according to Sornette & Malevergne discussed in section
(3.2.4). But to estimate λ̂ by the parametric approach we first need to calculate:
ε = X − β · Y with ε, X, Y as P vectors of N elements in chronologic order and scale
factor Cε estimated by: Ĉε = k kj=1 Nj · ενj,N with ε1,N ≥ ε2,N ≥ . . . ≥ εk,N and k
1
denoting the threshold. The problem now is that when β̂SI by one of the SI conditions
is calculated, the yielded β̂SI is only valid for tail data that fulfills the respective SI
condition. Therefore values for ε can only be calculated for return values where β̂SI is
valid, which is data that fulfills the respective SI condition. Looking at the equation
for the estimation of scale factor Cε we need rank ordered ε-values of the whole data
sample. But return data, which fulfills the SI conditions does not necessarily have
high ε-values and therefore the scale factor Ĉε adapted to the SI conditions is not the
correct one because with β̂SI ε cannot be calculated for the whole sample and the
ε-elements that we can calculate do not have to be the most extreme ones. Because
of that application of β-smile improvement to the parametric approach did not yield
meaningful results. That’s why I don’t present it.
Analysis of Coefficients
It is interesting to see the convergence of β̂SI (k) to β (calculated for the whole data set)
if we plot it according to the different conditions in dependence of increasing threshold k.
Figures (3.42), (3.43), (3.44), and (3.45) show β̂SI (k) plotted for the smaller reference
sample on first, on second, on third, and on fourth condition.
79
BMY CVX HPQ
1 0.6 2
0.5 0.4 0
0 0.2 −2
β, βSI
β, βSI
SI
β, β
−0.5 0 −4
−1 −0.2 −6
−1.5 −0.4 −8
0 0.2 0.4 0.6 0.8 1 0 0.2 0.4 0.6 0.8 1 0 0.2 0.4 0.6 0.8 1
k/N k/N k/N
KO MMM PG
1.5 1 2
1 1.5
0
1
0.5
β, βSI
β, βSI
SI
β, β
−1 0.5
0
0
−2
−0.5 −0.5
−1 −3 −1
80
0 0.2 0.4 0.6 0.8 1 0 0.2 0.4 0.6 0.8 1 0 0.2 0.4 0.6 0.8 1
k/N k/N k/N
SGP TXN WAG
2.5 60 2
2
40 1
1.5
β, βSI
β, βSI
SI
β, β
1 20 0
0.5
0 −1
0
−0.5 −20 −2
0 0.2 0.4 0.6 0.8 1 0 0.2 0.4 0.6 0.8 1 0 0.2 0.4 0.6 0.8 1
k/N k/N k/N
Figure 3.42: β̂SI (k) of the upper tails plotted in blue and of the lower tails plotted in black calculated by least square method applied on linear
additive single factor model: X = β · Y + ε and first SI condition: Y ≥ Y (k) ∩ X ≥ X(k) in dependence of threshold k. Reference β̂ calculated for
all data is given in green. Y denotes the index return vector of S&P 500 and Y denotes asset return vector of the nine assets for a time interval
ranging from January 1991 to December 2000.
BMY CVX HPQ
1.4 1 1.5
1.2 0.8
1
1 0.6
β, βSI
β, βSI
SI
β, β
0.5
0.8 0.4
0
0.6 0.2
0.4 0 −0.5
0 0.2 0.4 0.6 0.8 1 0 0.2 0.4 0.6 0.8 1 0 0.2 0.4 0.6 0.8 1
k/N k/N k/N
KO MMM PG
1.5 1.5 2
1.5
1 1
β, βSI
β, βSI
SI
β, β
1
0.5 0.5
0.5
81
0 0 0
0 0.2 0.4 0.6 0.8 1 0 0.2 0.4 0.6 0.8 1 0 0.2 0.4 0.6 0.8 1
k/N k/N k/N
SGP TXN WAG
1.5 2 2.5
2
1 1
1.5
β, βSI
β, βSI
SI
β, β
0.5 0
1
0 −1
0.5
−0.5 −2 0
0 0.2 0.4 0.6 0.8 1 0 0.2 0.4 0.6 0.8 1 0 0.2 0.4 0.6 0.8 1
k/N k/N k/N
additive single factor model: X = β · Y + ε and second SI condition: Y ≥ Y (k) in dependence of threshold k. Reference β̂ calculated for all data
is given in green. Y denotes the index return vector of S&P 500 and Y denotes asset return vector of the nine assets for a time interval ranging
from January 1991 to December 2000.
BMY CVX HPQ
1 0.5 1.5
0.5 1
0 0.5
0
β, βSI
β, βSI
SI
β, β
0
−0.5
−0.5 −0.5
−1 −1
−1.5 −1 −1.5
0 0.2 0.4 0.6 0.8 1 0 0.2 0.4 0.6 0.8 1 0 0.2 0.4 0.6 0.8 1
k/N k/N k/N
KO MMM PG
1 0.6 1
0.4
0 0.5
0.2
β, βSI
β, βSI
SI
β, β
−1 0
0
−2 −0.5
−0.2
82
−3 −0.4 −1
0 0.2 0.4 0.6 0.8 1 0 0.2 0.4 0.6 0.8 1 0 0.2 0.4 0.6 0.8 1
k/N k/N k/N
SGP TXN WAG
1 1 1
0.5
0.5 0.5
0
β, βSI
β, βSI
SI
β, β
0 0
−0.5
−0.5 −0.5
−1
−1 −1.5 −1
0 0.2 0.4 0.6 0.8 1 0 0.2 0.4 0.6 0.8 1 0 0.2 0.4 0.6 0.8 1
k/N k/N k/N
additive single factor model: X = β · Y + ε and third SI condition: X ≥ X(k) in dependence of threshold k. Reference β̂ calculated for all data
is given in green. Y denotes the index return vector of S&P 500 and Y denotes asset return vector of the nine assets for a time interval ranging
from January 1991 to December 2000.
BMY CVX HPQ
1 0.5 2
0.5 1
0
0
0
β, βSI
β, βSI
SI
β, β
−0.5 −0.5
−1
−1
−1
−1.5 −2
−2 −1.5 −3
0 0.2 0.4 0.6 0.8 1 0 0.2 0.4 0.6 0.8 1 0 0.2 0.4 0.6 0.8 1
k/N k/N k/N
KO MMM PG
1 1 1
0.5
0 0.5
0
β, βSI
β, βSI
SI
β, β
−1 0 −0.5
−1
−2 −0.5
−1.5
83
−3 −1 −2
0 0.2 0.4 0.6 0.8 1 0 0.2 0.4 0.6 0.8 1 0 0.2 0.4 0.6 0.8 1
k/N k/N k/N
SGP TXN WAG
1 0 1
0.5
−1 0
0
β, βSI
β, βSI
SI
β, β
−0.5 −2 −1
−1
−3 −2
−1.5
−2 −4 −3
0 0.2 0.4 0.6 0.8 1 0 0.2 0.4 0.6 0.8 1 0 0.2 0.4 0.6 0.8 1
k/N k/N k/N
additive single factor model: X = β · Y + ε and fourth SI condition: Y ≥ Y (k) ∪ X ≥ X(k) in dependence of threshold k. Reference β̂ calculated
for all data is given in green. Y denotes the index return vector of S&P 500 and Y denotes asset return vector of the nine assets for a time interval
ranging from January 1991 to December 2000.
β̂SI (k) calculated by the first and the second condition seem to converge best. For
some assets we have strong fluctuations in the extreme tails. Anyway, relative deviations
calculated for k/N = 4% given in table (3.17) agree well with the convergence plots.
To see it in detail I also plotted β̂SI for the first and for the third condition just in
the threshold area of extreme tails, which we determined to be around 3% to 5% of
total return data. Figure (3.46) shows β̂SI plotted in dependence of threshold k for
k/N = 3% . . . 6% calculated by first and third condition with β̂ calculated for all data
for comparison for upper tails and figure (3.47) shows the same for lower tails both for
the smaller data sample. Figures (3.48) and (3.49) show β̂SI calculated by the first
and by the second condition for the upper and for the lower tails of the bigger reference
sample also for k/N = 3% . . . 6%. The green line in all of these plots denotes the
reference β̂ calculated for the whole data sample and is therefore constant on the whole
interval. As we can see, there is no general pattern between β̂ calculated for all data
and β̂SI calculated by first and second SI conditions for the different assets. For some
cases the three are similar and for others not. But in many cases there is something
like a convergence of the β̂SI and β̂ around k/N = 4%. What we observe furthermore is
that in most cases the differences between β̂SI calculated by first and second conditions
and β̂ calculated for all data is within certain limits. It is interesting to see to what
extent λ̂+,− is affected by these discrepancies. Therefore I plotted λ̂+,− (k) calculated
by the first and by the second conditions for k/N = 3% . . . 10%. Figure (3.50) shows
plots of λ̂(k) calculated by β̂SI according to the first condition: Y ≥ Y (k) ∩ X ≥ X(k)
for upper tails and figure (3.51) for lower tails. Figures (3.52) and (3.53) show plots
of λ̂(k) calculated by β̂SI according to the second condition: Y ≥ Y (k) for upper and
lower tails. Also here differences between λ̂ calculated by β̂SI plotted in black and
λ̂ calculated by β̂ plotted in green in most cases are not ’huge’. In the positive tails
Texas Instruments Inc. (TXN), Hewlett Packard Co. (HPQ), and Procter & Gamble
Co. (PG) are exceptions, where we have big differences of λ̂ calculated using β̂SI by
first condition and λ̂ using β̂ of all data. In the negative tails we don’t find these big
discrepancies around k/N = 4%. Looking at λ̂ calculated by the second condition we
find some large discrepancies for asset 3M Co. (MMM) and Bristol-Myers Squibb Co.
(BMY) in the negative tails and in the positive tails we don’t find ’huge’ discrepancies
around k/N = 4%.
84
BMY CVX HPQ
1.2 0.6 1.5
1 0.4
1
β ,β
β ,β
β ,β
0.8 0.2
SI
SI
SI
0.5
0.6 0
0.4 −0.2 0
0.03 0.035 0.04 0.045 0.05 0.055 0.06 0.03 0.035 0.04 0.045 0.05 0.055 0.06 0.03 0.035 0.04 0.045 0.05 0.055 0.06
k/N k/N k/N
KO MMM PG
0.8 0.6 1.5
0.4
0.6
1
0.2
β ,β
β ,β
β ,β
0.4
SI
SI
SI
0
0.5
0.2
−0.2
0 −0.4 0
85
0.03 0.035 0.04 0.045 0.05 0.055 0.06 0.03 0.035 0.04 0.045 0.05 0.055 0.06 0.03 0.035 0.04 0.045 0.05 0.055 0.06
k/N k/N k/N
SGP TXN WAG
1 6 1.6
0.8 4 1.4
β ,β
β ,β
β ,β
0.6 2 1.2
SI
SI
SI
0.4 0 1
0.2 −2 0.8
0.03 0.035 0.04 0.045 0.05 0.055 0.06 0.03 0.035 0.04 0.045 0.05 0.055 0.06 0.03 0.035 0.04 0.045 0.05 0.055 0.06
k/N k/N k/N
Figure 3.46: β̂SI (k) calculated by the first condition: Y ≥ Y (k) ∩ X ≥ X(k) plotted in blue and by the second condition: Y ≥ Y (k) plotted in
black for the upper tail calculated by least squares method applied on linear additive single factor model: X = β · Y + ε in dependence of threshold
k for k/N = 3% . . . 6%. Reference β̂ calculated for all data is given in green. Y denotes the index return vector of S&P 500 and Y denotes asset
return vector of the nine assets for a time interval ranging from January 1991 to December 2000.
BMY CVX HPQ
1.5 0.8 1.5
1
0.6
β ,β 1 0.5
β ,β
β ,β
0.4 0
SI
SI
SI
0.5 −0.5
0.2
−1
0 0 −1.5
0.03 0.035 0.04 0.045 0.05 0.055 0.06 0.03 0.035 0.04 0.045 0.05 0.055 0.06 0.03 0.035 0.04 0.045 0.05 0.055 0.06
k/N k/N k/N
KO MMM PG
1.2 1.4
0.95
1 1.2
0.9
0.85 0.8 1
β ,β
β ,β
β ,β
0.8
SI
SI
SI
0.75 0.6 0.8
0.7
0.4 0.6
0.65
86
0.2 0.4
0.03 0.035 0.04 0.045 0.05 0.055 0.06 0.03 0.035 0.04 0.045 0.05 0.055 0.06 0.03 0.035 0.04 0.045 0.05 0.055 0.06
k/N k/N k/N
SGP TXN WAG
1.5 1 2
0.5
1
1
0
β ,β
β ,β
β ,β
0
SI
SI
SI
−0.5
0.5
−1
−1
0 −1.5 −2
0.03 0.035 0.04 0.045 0.05 0.055 0.06 0.03 0.035 0.04 0.045 0.05 0.055 0.06 0.03 0.035 0.04 0.045 0.05 0.055 0.06
k/N k/N k/N
black for the lower tail calculated by least squares method applied on linear additive single factor model: X = β · Y + ε in dependence of threshold
return vector of the nine assets for a time interval ranging from January 1991 to December 2000.
BMY CVX HPQ
1 1 1.4
1.2
0.5
0.5
1
β ,β
β ,β
β ,β
0
SI
SI
SI
0.8
0
−0.5
0.6
−0.5 −1 0.4
0.03 0.035 0.04 0.045 0.05 0.055 0.06 0.03 0.035 0.04 0.045 0.05 0.055 0.06 0.03 0.035 0.04 0.045 0.05 0.055 0.06
k/N k/N k/N
KO MMM PG
2.5 0.8 0.8
0.6
2 0.6
0.4
β ,β
β ,β
β ,β
1.5 0.4
SI
SI
SI
0.2
1 0.2
0
87
0.5 0 −0.2
0.03 0.035 0.04 0.045 0.05 0.055 0.06 0.03 0.035 0.04 0.045 0.05 0.055 0.06 0.03 0.035 0.04 0.045 0.05 0.055 0.06
k/N k/N k/N
SGP TXN WAG
0.8 2 1
0.6 1.5
0.8
1
0.4
β ,β
β ,β
β ,β
0.5 0.6
SI
SI
SI
0.2
0
0.4
0 −0.5
−0.2 −1 0.2
0.03 0.035 0.04 0.045 0.05 0.055 0.06 0.03 0.035 0.04 0.045 0.05 0.055 0.06 0.03 0.035 0.04 0.045 0.05 0.055 0.06
k/N k/N k/N
black for the upper tail calculated by least squares method applied on linear additive single factor model: X = β · Y + ε in dependence of threshold
return vector of the nine assets for a time interval ranging from July 1985 to Mars 2008.
BMY CVX HPQ
0.65 1.4
0.65
0.6 1.2
0.6
0.55 0.55 1
β ,β
β ,β
β ,β
0.5
SI
SI
SI
0.45 0.5 0.8
0.4
0.45 0.6
0.35
0.4 0.4
0.03 0.035 0.04 0.045 0.05 0.055 0.06 0.03 0.035 0.04 0.045 0.05 0.055 0.06 0.03 0.035 0.04 0.045 0.05 0.055 0.06
k/N k/N k/N
KO MMM PG
0.8 1.5
1.3
1.2 0.6 1
1.1
β ,β
β ,β
β ,β
1 0.4 0.5
SI
SI
SI
0.9
0.8 0.2 0
0.7
88
0 −0.5
0.03 0.035 0.04 0.045 0.05 0.055 0.06 0.03 0.035 0.04 0.045 0.05 0.055 0.06 0.03 0.035 0.04 0.045 0.05 0.055 0.06
k/N k/N k/N
SGP TXN WAG
1 0.6 1
0.4
0.8
0.5
0.2
β ,β
β ,β
β ,β
0.6
SI
SI
SI
0
0
0.4
−0.2
−0.5 −0.4 0.2

0.03 0.035 0.04 0.045 0.05 0.055 0.06 0.03 0.035 0.04 0.045 0.05 0.055 0.06 0.03 0.035 0.04 0.045 0.05 0.055 0.06
k/N k/N k/N
black for the lower tail calculated by least squares method applied on linear additive single factor model: X = β · Y + ε in dependence of threshold
return vector of the nine assets for a time interval ranging from July 1985 to Mars 2008.
As an additional information, ν̂ was always taken constant for the whole intervals
and estimated at k/N = 4%. Otherwise when ν̂ was adapted to the threshold k, fluc-
tuations of λ̂ in k were much stronger and dominated by ν̂. In order to understand
this, we reconsider figures (3.1) showing ν̂ for the index S&P 500 and the nine assets
for the positive tails and (3.3) showing ν̂ for the index S&P 500 and the nine assets
for the negative tails. In the positive tail of index S&P 500 we have a fluctuation
spectrum ranging from around 3.2 for k/N = 3% to 2.2 for k/N = 10% for the bigger
data sample, which is very high. In the negative tails the situation is similar. Fluctua-
tions furthermore become stronger as k approaches zero and Hill’s estimator cannot be
trusted anymore because of lack of data in that area. The situation for Gabaix’s bγn is
slightly better but as I wanted to observe the impact of β in k tail index α was assumed
to be constant for the considered interval of threshold k calculated at k/N = 4%.
We already know that adaptation of ˆl to threshold k does not change λ̂ significantly.
This can also be observed in figures (3.50), (3.51), (3.52), and (3.53), where plots in
green show ˆl(k) and plots in red show ˆl(k/N = 4%). In our area of interest k/N =
3% . . . 5% the two plots in red and green respectively stay close together showing us
that ˆl can be assumed more or less constant in the tails up to 10% of total data. For
ˆl(k) we used means that were not corrected for most extreme 0.5%: ˆl(k) = 1 Pk Xj,N .
k j=1 Yj,N
Anyway the difference between λ̂ calculated by uncorrected means and λ̂ calculated by
corrected means is small compared to differences between λ̂ calculated by the different
β-smile conditions and λ̂ with β̂ calculated by all data. Another approach would be
to calculate ˆl only by data that fulfills the β̂SI conditions. I also implemented this
adapted ˆlSI ’improvement’ for the first β̂SI condition. Plots are shown in figures (3.50)
and (3.51) given in blue. Implementing adapted ˆlSI for the second condition sometimes
yielded negative ˆl indicating that extreme positive return movements of assets happen
simultaneously with extreme negative return movements of index S&P 500 or vice versa.
This certainly yields meaningless results for λ̂. The differences between λ̂ calculated by
adapted ˆlSI and λ̂ calculated by ˆl were also small. Another indication that λ̂ is robust
to the choice of ˆl or that the assumption of constant ˆl in the tails is appropriate.
We can conclude that β seems to be the crucial parameter within these approaches.
Sometimes the two or three estimates (for different β approaches) are consistent and
for other cases they are not. These latter cases might diagnose the limits of the linear
β model to describe the dependence structure between asset and index.
89
BMY CVX HPQ
0.08 0.02 0.1
0.08
0.06 0.015
0.06
0.04 0.01
λ
λ
0.04
0.02 0.005
0.02
0 0 0
0.03 0.04 0.05 0.06 0.07 0.08 0.09 0.1 0.03 0.04 0.05 0.06 0.07 0.08 0.09 0.1 0.03 0.04 0.05 0.06 0.07 0.08 0.09 0.1
k/N k/N k/N
KO MMM PG
0.08 0.04 0.5
0.4
0.06 0.03
0.3
0.04 0.02
λ
λ
0.2
0.02 0.01
0.1
0 0 0
0.03 0.04 0.05 0.06 0.07 0.08 0.09 0.1 0.03 0.04 0.05 0.06 0.07 0.08 0.09 0.1 0.03 0.04 0.05 0.06 0.07 0.08 0.09 0.1
90
k/N k/N k/N

SGP TXN WAG
0.14 1 0.3
0.12 0.8 0.25

0.1
0.6 0.2
0.08
λ
λ
0.4 0.15
0.06
0.04 0.2 0.1
0.02 0 0.05
0.03 0.04 0.05 0.06 0.07 0.08 0.09 0.1 0.03 0.04 0.05 0.06 0.07 0.08 0.09 0.1 0.03 0.04 0.05 0.06 0.07 0.08 0.09 0.1
k/N k/N k/N
Figure 3.50: λ̂+ (k) for the upper tail of the nine assets and the index S&P 500 is plotted in black for β̂(k) calculated by least squares method
applied to linear additive single factor model: X = β · Y + ε and adapted to the first condition: Y ≥ Y (k) ∩ X ≥ X(k), ν̂(k = 4%) and ˆ l(k) in
ˆ
dependence of threshold k for k/N = 3% . . . 10%, in blue for β̂(k) and l(k) adapted to the first SI condition for comparison, in green for Reference
β̂ and ˆl(k), and for Reference λ̂+ (k = 4%) is given in red. Y denotes the index return vector of S&P 500 and X denotes asset return vector of the
nine assets for a time interval ranging from January 1991 to December 2000.
BMY CVX HPQ
0.06 0.02 0.08
0.05
0.015 0.06
0.04
0.03 0.01 0.04

λ
λ
0.02
0.005 0.02
0.01
0 0 0
0.03 0.04 0.05 0.06 0.07 0.08 0.09 0.1 0.03 0.04 0.05 0.06 0.07 0.08 0.09 0.1 0.03 0.04 0.05 0.06 0.07 0.08 0.09 0.1
k/N k/N k/N
KO MMM PG
0.12 0.06 0.2
0.1 0.05
0.15
0.04
0.08
0.03 0.1
λ
λ
0.06
0.02
0.05
0.04 0.01
0.02 0 0
91
0.03 0.04 0.05 0.06 0.07 0.08 0.09 0.1 0.03 0.04 0.05 0.06 0.07 0.08 0.09 0.1 0.03 0.04 0.05 0.06 0.07 0.08 0.09 0.1
k/N k/N k/N
SGP TXN WAG
0.05 0.015 0.08
0.04
0.06
0.01
0.03
0.04
λ
λ
0.02
0.005
0.02
0.01
0 0 0
0.03 0.04 0.05 0.06 0.07 0.08 0.09 0.1 0.03 0.04 0.05 0.06 0.07 0.08 0.09 0.1 0.03 0.04 0.05 0.06 0.07 0.08 0.09 0.1
k/N k/N k/N
Figure 3.51: λ̂+ (k) for the lower tail of the nine assets and the index S&P 500 is plotted in black for β̂(k) calculated by least squares method
applied to linear additive single factor model: X = β · Y + ε and adapted to the first condition: Y ≥ Y (k) ∩ X ≥ X(k), ν̂(k = 4%) and ˆ l(k) in
dependence of threshold k for k/N = 3% . . . 10%, in blue for β̂(k) and ˆl(k) adapted to the first SI condition for comparison, in green for Reference
β̂ and ˆl(k), and for Reference λ̂+ (k = 4%) is given in red. Y denotes the index return vector of S&P 500 and X denotes asset return vector of the
nine assets for a time interval ranging from January 1991 to December 2000.
BMY CVX HPQ
0.2 0.02 0.2
0.15 0.015 0.15
0.1 0.01 0.1

λ
λ
0.05 0.005 0.05
0 0 0
0.03 0.04 0.05 0.06 0.07 0.08 0.09 0.1 0.03 0.04 0.05 0.06 0.07 0.08 0.09 0.1 0.03 0.04 0.05 0.06 0.07 0.08 0.09 0.1
k/N k/N k/N
KO MMM PG
0.08 0.04 0.03
0.025
0.06 0.03
0.02
0.04 0.02 0.015

λ
λ
0.01
0.02 0.01
0.005
0 0 0
92
0.03 0.04 0.05 0.06 0.07 0.08 0.09 0.1 0.03 0.04 0.05 0.06 0.07 0.08 0.09 0.1 0.03 0.04 0.05 0.06 0.07 0.08 0.09 0.1
k/N k/N k/N
SGP TXN WAG
0.06 1 0.5
0.05 0.4
0.5
0.04
0.3
0.03 0
λ
λ
0.2
0.02
−0.5
0.01 0.1
0 −1 0
0.03 0.04 0.05 0.06 0.07 0.08 0.09 0.1 0.03 0.04 0.05 0.06 0.07 0.08 0.09 0.1 0.03 0.04 0.05 0.06 0.07 0.08 0.09 0.1
k/N k/N k/N
Figure 3.52: λ̂+ (k) for the upper tail of the nine assets and the index S&P 500 is plotted in black for β̂(k) calculated by least squares method
applied to linear additive single factor model: X = β · Y + ε and adapted to the second condition: Y ≥ Y (k), ν̂(k = 4%) and ˆ l(k) in dependence
of threshold k for k/N = 3% . . . 10%, in blue for β̂(k) and ˆl(k) adapted to the first SI condition for comparison, in green for Reference β̂ and ˆ
l(k),
+
and for Reference λ̂ (k = 4%) is given in red. Y denotes the index return vector of S&P 500 and X denotes asset return vector of the nine assets
for a time interval ranging from January 1991 to December 2000.
BMY CVX HPQ
0.2 0.08 0.14
0.12
0.15 0.06
0.1
0.1 0.04
λ
λ
0.08
0.05 0.02
0.06
0 0 0.04
0.03 0.04 0.05 0.06 0.07 0.08 0.09 0.1 0.03 0.04 0.05 0.06 0.07 0.08 0.09 0.1 0.03 0.04 0.05 0.06 0.07 0.08 0.09 0.1
k/N k/N k/N
KO MMM PG
0.2 0.4 0.2
0.15 0.3 0.15
0.1 0.2 0.1

λ
λ
0.05 0.1 0.05
0 0 0
93
0.03 0.04 0.05 0.06 0.07 0.08 0.09 0.1 0.03 0.04 0.05 0.06 0.07 0.08 0.09 0.1 0.03 0.04 0.05 0.06 0.07 0.08 0.09 0.1
k/N k/N k/N
SGP −7
x 10 TXN WAG
0.2 3 0.2
2.5
0.15 0.15
2
0.1 1.5 0.1

λ
λ
1
0.05 0.05
0.5
0 0 0
0.03 0.04 0.05 0.06 0.07 0.08 0.09 0.1 0.03 0.04 0.05 0.06 0.07 0.08 0.09 0.1 0.03 0.04 0.05 0.06 0.07 0.08 0.09 0.1
k/N k/N k/N
Figure 3.53: λ̂+ (k) for the lower tail of the nine assets and the index S&P 500 is plotted in black for β̂(k) calculated by least squares method
applied to linear additive single factor model: X = β · Y + ε and adapted to the second condition: Y ≥ Y (k), ν̂(k = 4%) and ˆ l(k) in dependence
of threshold k for k/N = 3% . . . 10%, in blue for β̂(k) and ˆl(k) adapted to the first SI condition for comparison, in green for Reference β̂ and ˆ
l(k),
+
and for Reference λ̂ (k = 4%) is given in red. Y denotes the index return vector of S&P 500 and X denotes asset return vector of the nine assets
for a time interval ranging from January 1991 to December 2000.
To establish uncertainty of upper and lower tail dependence coefficients I included
bootstrap approximations 14 . The sampling has been performed by creating bootstrap
samples of historical day-by-day return data of index S&P 500 and searching for corre-
sponding asset return data. I always sampled the whole data sets because I think that
this is more representative than just sampling of tails. Tables (3.20) and (3.21) show
quantiles, extreme values, and standard deviations (’std bs’) of the results of bootstrap
sampling of λ+,− for the smaller and bigger reference samples using β̂SI calculated by
the first SI condition: {Y ≥ Y (k)} ∩ {X ≥ X(k)} and tables (3.22) and (3.23) show
the results of bootstrap sampling of λ+,− for the smaller and bigger reference samples
using β̂SI calculated by the second SI condition: Y ≥ Y (k). λ̂+,− were calculated using
the mean values of ˆl = Xj,N /Yj,N for j = 1 . . . k with k = 100 for the smaller sample
and with k = 229 for the bigger sample and λ̂+,− c were calculated using the mean values
of ˆl from c . . . k with c = 13 and k = 100 for the smaller sample and for k = c . . . k with
c = 29 and k = 229 for the bigger sample.
Relative errors of average bootstrap tail dependence coefficients λ̂+,−bs compared to
+,−
tail dependence coefficients λ̂ of the original sample were unusually big in most
cases. If tail dependence coefficient estimates were very small (≈ 10−3 ) relative errors
could have become multiples of the estimates. Quantiles of the bigger data samples in
some cases look very consistent and are approximately Gaussian distributed. In some
other cases first of all if β̂SI are close to zero accuracy of the results become poor as
it can be observed at the example of assets 3M Co. (MMM) and Texas-Instruments
inc. (TXN) in the lower tails of the bigger data set applying the first SI condition
and at the example of Schering & Plough Corp. In the positive tail also of the bigger
data sample applying the first SI condition. 95% quantiles for example are around the
size of the estimated total value of the respective tail dependence coefficient estimates
provided λ̂ is not too small. For the smaller data set it can be observed that for
small estimates of the tail dependence coefficient by the first as well as the second
condition, quantiles get relatively high. Accuracy here seems to be poor. Overall the
situation concerning bootstrap quantiles of β-smile improvement estimates calculated
by the non-parametric approach according to Sornette & Malevergne, applying the first
or the second condition looks worse compared to the classic non-parametric approach
with β̂ calculated by all data. What makes the difference is that estimates calculated
by SI conditions at times become very small and therefore relative error bars become
very high. β̂SI therefore does not seem to have a negative stake on the error bars
of λ̂. Another reason might be that because β̂SI shows strong fluctuations in k, it is
a further source of uncertainty that distorts tail dependence estimates. Maybe if we
use much bigger data sets with more data in the tails the estimates would become
more stable. The problem is that this has not much practical application because our
bigger data set already contains more than 5000 daily observations and for many assets
there is not more data available. Looking at the second SI condition the situation is
even worse. Relative errors are mostly within limits but tail dependence coefficient
estimates are very inaccurate. Standard deviations are at least of the size of the total
estimate. Anyways adaptation of β to the tails seems to add too much uncertainty to
the estimates.
14
The matlab m-file for the bootstrap sampling with replacement of λ+,− estimated by the non-parametric
approach according to Sornette & Malevergne with β̂ calculated by first and second SI conditions is denoted
by: bootstr simple impr alldata.m and enclosed to the data CD
94
constr 1 m=2507 bs=1000
λbs,mean λbs,mean
BMY 0.06 0.42 0.93 0.12 0.08 0.08 0.01 1.79 0.52 0.03 0.02 0.02
CVX 0.00 Inf 0.45 0.01 0.00 0.02 0.02 2.61 0.38 0.12 0.03 0.03
HPQ 0.00 9.28 0.77 0.01 0.00 0.03 0.01 Inf 1.02 0.01 0.01 0.06
KO 0.04 3.07 1.04 0.10 0.10 0.09 0.09 1.18 0.61 0.33 0.20 0.13
MMM 0.04 Inf 1.00 0.23 0.04 0.17 0.04 0.55 1.00 0.12 0.06 0.07
PG 0.37 0.21 0.63 0.58 0.55 0.40 0.05 2.58 0.56 0.17 0.10 0.08
SGP 0.11 2.39 0.91 0.42 0.19 0.21 0.01 2.89 0.08 0.02 0.01 0.01
TXN 0.79 0.24 0.84 0.82 0.78 0.40 0.04 Inf 1.01 0.10 0.04 0.21
WAG 0.24 1.04 0.78 0.78 0.45 0.34 0.03 Inf 0.60 0.14 0.04 0.08
95
λc
BMY 0.06 0.43 0.92 0.12 0.10 0.09 0.02 1.86 0.51 0.05 0.03 0.03
CVX 0.00 Inf 0.60 0.01 0.00 0.02 0.02 2.71 0.34 0.06 0.03 0.04
HPQ 0.00 9.25 0.88 0.01 0.00 0.03 0.01 Inf 1.01 0.01 0.01 0.09
KO 0.04 3.09 1.04 0.11 0.10 0.10 0.13 1.21 0.70 0.40 0.30 0.20
MMM 0.04 Inf 0.96 0.20 0.04 0.19 0.05 0.60 1.00 0.11 0.07 0.08
PG 0.37 0.24 0.61 0.59 0.58 0.40 0.09 2.48 0.66 0.30 0.20 0.10
SGP 0.11 2.41 0.90 0.26 0.20 0.20 0.01 2.67 0.10 0.02 0.01 0.01
TXN 0.79 0.23 0.83 0.81 0.74 0.42 0.04 Inf 1.04 0.10 0.04 0.20
WAG 0.25 1.02 0.81 0.80 0.47 0.31 0.03 Inf 0.78 0.18 0.06 0.09
interval from January 1991 to December 2000. β̂j have been calculated on the first SI condition: Y ≥ Y (k) ∩ X ≥ X(k). ’inf’ denotes ·/0.
constr 1 m=5736 bs=1000
λbs,mean λbs,mean
BMY 0.15 0.29 0.92 0.31 0.19 0.09 0.01 0.52 0.09 0.01 0.01 0.01
CVX 0.18 1.01 0.78 0.60 0.30 0.21 0.03 0.10 0.29 0.03 0.03 0.03
HPQ 0.04 0.32 0.49 0.12 0.11 0.12 0.01 0.01 0.00 0.01 0.01 0.01
KO 0.65 0.41 0.59 0.58 0.58 0.38 0.21 0.08 0.31 0.20 0.19 0.12
MMM 0.09 0.48 0.91 0.19 0.10 0.09 0.02 201.00 0.78 0.09 0.04 0.06
PG 0.13 1.00 0.92 0.41 0.18 0.19 0.45 0.11 0.61 0.61 0.55 0.37
SGP 0.02 9.03 0.49 0.09 0.05 0.05 0.05 3.02 0.92 0.20 0.08 0.12
TXN 0.16 1.01 0.81 0.57 0.31 0.22 0.00 Inf 0.10 0.01 0.01 0.01
WAG 0.12 0.32 0.90 0.23 0.16 0.10 0.02 6.96 0.57 0.09 0.02 0.07
96
λc
BMY 0.15 0.28 0.92 0.28 0.21 0.09 0.01 0.56 0.10 0.02 0.01 0.01
CVX 0.18 1.00 0.79 0.57 0.30 0.21 0.03 0.10 0.31 0.04 0.03 0.03
HPQ 0.04 0.29 0.47 0.13 0.11 0.10 0.01 0.03 0.03 0.01 0.01 0.01
KO 0.65 0.40 0.59 0.57 0.56 0.39 0.28 0.09 0.33 0.32 0.20 0.10
MMM 0.09 0.49 0.89 0.21 0.09 0.08 0.03 137.00 1.00 0.10 0.06 0.08
PG 0.13 1.00 0.91 0.43 0.21 0.19 0.54 0.05 0.53 0.51 0.50 0.40
SGP 0.02 9.02 0.52 0.10 0.04 0.05 0.07 3.02 0.91 0.30 0.11 0.19
TXN 0.16 1.01 0.80 0.59 0.29 0.21 0.00 Inf 0.17 0.02 0.01 0.01
WAG 0.12 0.31 0.91 0.26 0.21 0.09 0.03 6.01 0.79 0.11 0.03 0.08
interval from July 1985 to Mars 2008. β̂j have been calculated on the first SI condition: Y ≥ Y (k) ∩ X ≥ X(k). ’inf’ denotes ·/0.
constr 2 m=2507 bs=1000
λbs,mean λbs,mean
BMY 0.14 0.95 0.88 0.29 0.21 0.22 0.19 0.09 0.82 0.21 0.19 0.10
CVX 0.02 11.03 0.59 0.10 0.03 0.04 0.07 0.20 0.41 0.13 0.12 0.09
HPQ 0.19 0.39 0.80 0.32 0.23 0.20 0.09 0.37 0.94 0.22 0.10 0.11
KO 0.05 2.02 0.73 0.21 0.08 0.09 0.16 0.32 0.77 0.38 0.31 0.20
MMM 0.01 2.96 0.21 0.05 0.03 0.03 0.27 0.03 0.71 0.39 0.18 0.18
PG 0.05 37.95 0.87 0.18 0.09 0.11 0.11 0.48 0.89 0.22 0.19 0.13
SGP 0.10 3.03 0.88 0.39 0.21 0.20 0.12 0.12 0.62 0.21 0.08 0.10
TXN 0.00 Inf 0.81 0.00 0.00 0.03 0.00 Inf 0.04 0.00 0.00 0.00
WAG 0.28 0.68 0.73 0.57 0.38 0.28 0.11 1.81 0.91 0.40 0.19 0.19
97
λc
BMY 0.15 0.96 0.90 0.40 0.20 0.21 0.27 0.10 0.69 0.32 0.20 0.16
CVX 0.02 11.02 0.58 0.11 0.03 0.04 0.08 0.22 0.68 0.14 0.11 0.10
HPQ 0.19 0.48 0.80 0.30 0.21 0.20 0.14 0.56 0.89 0.28 0.09 0.19
KO 0.05 1.62 0.72 0.22 0.09 0.08 0.23 0.28 0.81 0.61 0.37 0.20
MMM 0.01 2.73 0.19 0.05 0.03 0.03 0.33 0.04 0.70 0.48 0.26 0.23
PG 0.05 40.04 0.89 0.26 0.08 0.12 0.18 0.41 0.79 0.40 0.20 0.21
SGP 0.10 2.47 0.89 0.40 0.22 0.19 0.17 0.10 0.81 0.21 0.09 0.12
TXN 0.00 Inf 0.86 0.00 0.00 0.03 0.00 Inf 0.13 0.00 0.00 0.00
WAG 0.28 0.73 0.72 0.68 0.50 0.31 0.16 1.23 0.80 0.53 0.28 0.18
interval from January 1991 to December 2000. β̂j have been calculated on the second SI condition: Y ≥ Y (k). ’inf’ denotes ·/0.
constr 2 m=5736 bs=1000
λbs,mean λbs,mean
BMY 0.01 Inf 0.18 0.04 0.01 0.02 0.04 0.88 0.39 0.09 0.08 0.05
CVX 0.01 Inf 0.30 0.04 0.01 0.03 0.08 0.21 0.47 0.08 0.07 0.10
HPQ 0.06 2.03 0.68 0.20 0.10 0.09 0.04 0.20 0.21 0.04 0.03 0.02
KO 0.19 1.02 0.79 0.79 0.38 0.30 0.34 0.07 0.70 0.31 0.21 0.10
MMM 0.04 123.95 0.51 0.10 0.09 0.07 0.08 6.03 0.72 0.33 0.23 0.11
PG 0.01 Inf 0.47 0.03 0.01 0.02 0.10 Inf 0.88 0.48 0.22 0.20
SGP 0.02 Inf 1.02 0.07 0.02 0.08 0.04 Inf 0.82 0.21 0.10 0.09
TXN 0.00 Inf 0.21 0.00 0.00 0.01 0.00 Inf 0.12 0.00 0.00 0.00
WAG 0.04 2.01 0.47 0.13 0.07 0.07 0.05 2.01 0.87 0.13 0.05 0.09
98
λc
BMY 0.01 Inf 0.26 0.04 0.01 0.02 0.05 1.04 0.46 0.10 0.08 0.06
CVX 0.01 Inf 0.31 0.04 0.01 0.03 0.09 0.19 0.47 0.09 0.07 0.06
HPQ 0.06 2.02 0.68 0.20 0.11 0.09 0.05 1.00 0.30 0.07 0.04 0.03
KO 0.19 1.02 0.81 0.81 0.40 0.29 0.45 0.06 0.61 0.32 0.28 0.18
MMM 0.04 123.97 0.52 0.10 0.09 0.07 0.10 6.03 0.88 0.34 0.21 0.20
PG 0.01 Inf 0.49 0.03 0.01 0.03 0.14 Inf 0.89 0.77 0.44 0.31
SGP 0.02 Inf 1.01 0.07 0.02 0.08 0.06 Inf 0.90 0.21 0.20 0.10
TXN 0.00 Inf 0.20 0.00 0.00 0.01 0.00 Inf 0.11 0.01 0.00 0.01
WAG 0.04 1.98 0.49 0.13 0.07 0.07 0.06 2.02 0.92 0.20 0.06 0.08
interval from July 1985 to Mars 2008. β̂j have been calculated on the second SI condition: Y ≥ Y (k). ’inf’ denotes ·/0.
I wanted to include a rolling time window observation of the β-smile improvement
estimates just to see whether λ̂ calculated by SI conditions performs similarly as λ̂
calculated by β̂ of the whole sample. Figures (3.54) and (3.55) show β̂SI for the window
size of S = 2500 in dependence of time calculated by the first and by the second SI
conditions and figures (3.56) and (3.57) show λ̂+,− calculated by β̂SI for the window
size of S = 2500 in dependence of time by the first and by the second SI conditions.
As we can see fluctuations of λ̂ are quite strong and a window size of S = 2500 seems
to be the minimum size to obtain more or less reasonable estimates. Choosing smaller
window sizes yields instable results for both β̂SI and λ̂. It is interesting to observe that
whereas β̂SI calculated by first condition seems to be high in the early period up to
N = 3000 for most assets, β̂SI calculated by the second condition is mostly negative
in that area. The spectron of fluctuations on the interval (−1, 1.5) seems to be similar
for both β̂SI . Hewlett-Packard Co. (HPQ) is a special case because it shows for both
conditions a significant difference between β̂SI calculated for the upper tail and β̂SI
calculated for the lower tail. The case, where the linear dependences of asset Xj and
index Yj are different in the positive and the negative tail, is an aspect that β̂ calculated
by all data is not able to display.
What furthermore can be observed in all of the four figures is that the overall trend
for my shown β̂SI and corresponding λ̂ is the change in time of the positive tails
dominating over negative tail to a tendency of negative tails to dominate the positive
tails. This counts primarily for the second condition with assets Hewlett-Packard Co.
(HPQ) and Texas Instruments Inc. (TXN) being exceptions that show a counter-trend.
Looking at figure (3.57) showing λ̂ calculated by the second SI condition, it seems that
both upper and lower tail dependence have increased over time.
I also applied bootstrap sampling over time to λ̂+,− calculated by first and second
β-smile conditions in order to see whether my impression of unusual high quantiles is
consistent over time 15 . This seems to be the case. Assets with more or less limited
quantile deviations show this behavior over time and others remain inaccurate all the
time. Furthermore it seems that there are windows were the quantiles become much
bigger and then after some time get back to their normal extent.
It is a pity that estimates of λ̂ calculated by β-smile conditions are not more robust
because the approach is very promising. Nevertheless the β-smile improvement condi-
tions can be helpful as a complement to other approaches because they allow for new
insights into the structure of extreme dependence of an asset and the index, represent-
ing the market factor, particularly in terms of showing differences between negative and
positive tails. The classic non-parametric approach describes the dependence of asset
and index by a linear relation that is assumed to be constant over the whole range of
the distribution. This assumption might be to restrictive in some cases. In order to find
and to describe these discrepancies by an advanced concept with the aspect of being
more general in describing dependence structures, the β-smile improvement conditions
can be applied.
15
Results of bootstrap sampling of the rolling time window estimates for first and second SI conditions with
window size S = 2500 data points can be observed on the data CD submitted with the thesis in the folder:
window results
99
BMY CVX HPQ
1.5 2 1.5
1.5 1
1 0.5
1
0
β
β
0.5
0.5 −0.5
0 −1
0 −0.5 −1.5
2500 3000 3500 4000 4500 5000 5500 6000 2500 3000 3500 4000 4500 5000 5500 6000 2500 3000 3500 4000 4500 5000 5500 6000
N N N
KO MMM PG
4 1.5 2
3 1.5
1
2 1
0.5
β
β
1 0.5
0
0 0
100
−1 −0.5 −0.5
2500 3000 3500 4000 4500 5000 5500 6000 2500 3000 3500 4000 4500 5000 5500 6000 2500 3000 3500 4000 4500 5000 5500 6000
N N N
SGP TXN WAG
2 6 2
1.5 4
1
1
2
0.5 0
β
β
0
0
−1
−0.5 −2
−1 −4 −2
2500 3000 3500 4000 4500 5000 5500 6000 2500 3000 3500 4000 4500 5000 5500 6000 2500 3000 3500 4000 4500 5000 5500 6000
N N N
Figure 3.54: β̂SI (N ) plotted in black for the upper tails and plotted in green for the lower tails for 9 assets given by X and index S&P 500 given
by Y using the linear single factor model: X = β · Y + ε and the first SI condition: Y ≥ Y (k) ∩ X ≥ X(k) for rolling time horizon windows of
S = 2500 considered data points from N = (1 . . . S), (2 . . . S + 1), . . . , (5736 − S + 1 . . . 5736) or a total time interval from July 1985 to Mars 2008.
BMY CVX HPQ
1.5 2 2
1 1.5
1
0.5 1
0
β
β
0 0.5
−1
−0.5 0
−1 −2 −0.5
2500 3000 3500 4000 4500 5000 5500 6000 2500 3000 3500 4000 4500 5000 5500 6000 2500 3000 3500 4000 4500 5000 5500 6000
N N N
KO MMM PG
1.5 1.5 1.5
1 1
1
0.5 0.5
0.5
β
β
0 0
0
−0.5 −0.5
101
−0.5 −1 −1
2500 3000 3500 4000 4500 5000 5500 6000 2500 3000 3500 4000 4500 5000 5500 6000 2500 3000 3500 4000 4500 5000 5500 6000
N N N
SGP TXN WAG
2 2 2
1.5
1 1.5
1
0.5 0 1
β
β
0
−1 0.5
−0.5
−1 −2 0
2500 3000 3500 4000 4500 5000 5500 6000 2500 3000 3500 4000 4500 5000 5500 6000 2500 3000 3500 4000 4500 5000 5500 6000
N N N
Figure 3.55: β̂SI (N ) plotted in black for the upper tails and plotted in green for the lower tails for 9 assets given by X and index S&P 500 given
by Y using the linear single factor model: X = β · Y + ε and the second SI condition: Y ≥ Y (k) for rolling time horizon windows of S = 2500
BMY CVX HPQ
0.5 1 0.2
0.4 0.8
0.15
0.3 0.6
0.1
λ
λ
0.2 0.4
0.05
0.1 0.2
0 0 0
2500 3000 3500 4000 4500 5000 5500 6000 2500 3000 3500 4000 4500 5000 5500 6000 2500 3000 3500 4000 4500 5000 5500 6000
N N N
KO MMM PG
1 0.5 1
0.8 0.4 0.8
0.6 0.3 0.6

λ
λ
0.4 0.2 0.4
0.2 0.1 0.2

102
0 0 0
2500 3000 3500 4000 4500 5000 5500 6000 2500 3000 3500 4000 4500 5000 5500 6000 2500 3000 3500 4000 4500 5000 5500 6000
N N N
SGP TXN WAG
0.5 1 0.5
0.4 0.8 0.4
0.3 0.6 0.3

λ
λ
0.2 0.4 0.2
0.1 0.2 0.1
0 0 0
2500 3000 3500 4000 4500 5000 5500 6000 2500 3000 3500 4000 4500 5000 5500 6000 2500 3000 3500 4000 4500 5000 5500 6000
N N N
Figure 3.56: λ+ (N ) for upper tails of index S&P 500 and the nine assets plotted in blue and λ− (N ) for lower tails plotted in red using non-
ν̂
+,− l +,−
parametric approach given by equation λ̂ = 1/ max 1, +,− with coefficients ν̂, l, and β̂SI for rolling time horizon windows of S = 2500
β̂SI
+,−
considered data points from N = (1 . . . S), (2 . . . S + 1), . . . , (5736 − S + 1 . . . 5736) or a total time interval from July 1985 to Mars 2008. β̂SI were
calculated using the linear single factor model: X = β · Y + ε and the first SI condition: Y ≥ Y (k) ∩ X ≥ X(k).
BMY CVX HPQ
0.2 0.4 0.5
0.4
0.15 0.3
0.3
0.1 0.2
λ
λ
0.2
0.05 0.1
0.1
0 0 0
2500 3000 3500 4000 4500 5000 5500 6000 2500 3000 3500 4000 4500 5000 5500 6000 2500 3000 3500 4000 4500 5000 5500 6000
N N N
KO MMM PG
0.5 0.8 0.4
0.4
0.6 0.3
0.3
0.4 0.2
λ
λ
0.2
0.2 0.1
0.1
103
0 0 0
2500 3000 3500 4000 4500 5000 5500 6000 2500 3000 3500 4000 4500 5000 5500 6000 2500 3000 3500 4000 4500 5000 5500 6000
N N N
SGP TXN WAG
0.5 0.08 0.8
0.4
0.06 0.6
0.3
0.04 0.4
λ
λ
0.2
0.02 0.2
0.1
0 0 0
2500 3000 3500 4000 4500 5000 5500 6000 2500 3000 3500 4000 4500 5000 5500 6000 2500 3000 3500 4000 4500 5000 5500 6000
N N N
Figure 3.57: λ+ (N ) for upper tail of index S&P 500 and the nine assets plotted in blue and λ− (N ) for lower tail plotted in red using non-parametric
ν̂
+,− l +,−
approach given by equation λ̂ = 1/ max 1, +,− with coefficients ν̂, l, and β̂SI for rolling time horizon windows of S = 2500 considered
β̂SI
+,−
data points from N = (1 . . . S), (2 . . . S + 1), . . . , (5736 − S + 1 . . . 5736) or a total time interval from July 1985 to Mars 2008. β̂SI were calculated
using the linear single factor model: X = β · Y + ε and the second SI condition: Y ≥ Y (k).
3.4 Non-Parametric Approaches according to
Schmidt & Stadtmüller
Within this section several concepts of non-parametric approaches for the estimation
of tail dependence according to Schmidt & Stadtmüller published in [24] (2005) are
discussed. In the first sub-section a presentation of the most important concepts and
assumptions of the paper is provided. Then the second sub-section again is devoted to
the implementation of the concepts and in the third sub-section results are analyzed.

In [24] (2005) a set of non-parametric estimators is proposed for the upper and lower
tail copula ΛU (x, y) and ΛL (x, y) (x, y)′ ∈ R2+ . Non-parametric estimation is used if
no general finite-dimensional parametrization of tail copulas exists.
Let Cm denote the empirical copula defined by:
Cm (u, v) = Fm (G−1 −1
m (u), Hm (v)), (u, v)′ ∈ [0, 1]2 (3.77)
with Fm , Gm , Hm being the empirical distribution functions corresponding to F, G, H.

−1 −1
Analogously we define the ’empirical survival copula’ by: C m (u, v) = F m (Gm (u), H m (v)),
(u, v)′ ∈ [0, 1]2 with
m
1 X
F m (x, y) = 1 (j) (j) (3.78)
m j=1 {X >x,Y >y}
(j) (j)
and Gm = 1 − Gm , H m = 1 − Hm . Let Rm1 and Rm2 denote the rank of X (j) and
Y (j) , j = 1, . . . , m respectively. A set of estimators is given by:
m
m kx ky 1X
Λ̂L,m (x, y) := Cm ( , ) ≈ 1 (j) (j) (3.79)
k m m k j=1 {Rm1 ≤kx and Rms ≤ky}
m
m kx ky 1X
Λ̂U,m (x, y) := C m ( , ) ≈ 1 (j) (j) (3.80)
k m m k j=1 {Rm1 >m−kx and Rms >m−ky}
with some parameter k ∈ {1, . . . , m} chosen by the statistician. The estimators

Λ̂U,m(x, y) and Λ̂L,m (x, y) are referred to as ’empirical tail copulas’. For the asymp-
totic result we assume that k = k(m) → ∞ and k(m) → 0 as m → ∞.
A related estimator was introduced by Huang in [25] (1992), [26] (1998), and [27]
(1998). The relation between the upper tail copula and the stable tail dependence l is
given by
ΛU (x, y) = x + y − l(x, y). The Corresponding estimator for ΛL (x, y) on R2+ is:

EV T m kx ky
Λ̂L,m (x, y) = x + y − Cm ,
k m m
m
1X
≈x+y− 1 (j) (j) , (x, y) ∈ R2+ (3.81)
k j=1 {Rm1 ≤kx or Rm2 ≤ky}
104
and the corresponding estimator for ΛU (x, y) on R2+ is:

m kx ky
Λ̂EV T
U,m (x, y) =x+y− Cm ,
k m m
m
1X
≈x+y− 1 (j) (j) , (x, y) ∈ R2+ (3.82)
k j=1 {Rm1 >m−kx or Rm2 >m−ky}
with k = k(m) → ∞ and k(m) → 0 as m → ∞. An important practical problem

again arises on the optimal choice of the threshold parameter k, which leads to the
usual variance-bias problem. Based on the above estimates of the lower and upper tail
copula, for the upper tail dependence coefficient
λ̂U,m := Λ̂U,m (1, 1), and λ̂EV T EV T

U,m := Λ̂U,m (1, 1) (3.83)
are proposed as non-parametric estimators and analogous estimates for the lower tail
dependence coefficient.
3.4.2 Implementation of Non-Parametric Approaches

It is the purpose of this sub-section to provide an insight into details concerning the
implementation of the above introduced concepts into Matlab m-files and apply the
function handles to our reference data sets of historical daily return data of the index
S&P 500 and the nine assets for the calculation of upper and lower tail dependence coef-
ficient estimates. Results can then be compared to further calculations, i.e. estimations
of tail dependence λ+,− according to Sornette & Malevergne.
Calculation of general Rank-Order Statistics

For the calculation of tail copulas Λ̂U,m , Λ̂L,m , Λ̂EV T EV T
U,m , and Λ̂L,m between the index S&P
500 and an asset as described in (3.79), (3.80), (3.81), and (3.82) we need rank-ordered
(j) (j)
statistics of index returns X (j) and asset returns Y (j) denoted by Rm1 and Rm2 with
j = 1, . . . , m. Then we define a count variable, which passes through the rank vectors
checking for the required conditions given by Boolean ’and’ and ’or’.
Given daily return data for any asset as from January 1991 to December 2000
(m=2506) sorted in descending order raises the question, how to rank equal returns.
(j)
The simplest way to calculate Rm,1 is to write an algorithm that first creates a return-
data table sorted in descending order from which it top down picks out values and
searches for equivalents in the historical return data table and then displaces the found
equivalents by increasing rank numbers. Equal return values receive equal rank, de-
scribed by natural numbers, whereas the step size always equals one. Looking at the
resulting rank tables for different assets, we observe that maximal rank numbers vary.
Therefore we would have to adapt threshold k to the different assets.
(j) (j)
Another way to calculate Rm1 and Rm2 , which after my opinion is more reasonable,
is to adapt the rank numbers to the weight of values, described by the number of equal
return values. This means that equal return values still receive equal ranks but larger
step sizes to preceding and successive ranks indicating the number (weight) of equal
return values. To achieve this, I included the following relation to the above described
code:
105
Pn pre
eq j=1 Rm,· +j
Rm,· = , (3.84)
n
pre eq
where Rm,· denotes the rank previous to the set of n equal return-values ranked by Rm,·
This has the advantage that for each return table with equal amount of data measured
simultaneously (i.e. m = 2506), maximal ranks are equal to m, which leaves threshold
k consistent with all samples. To have equal k for different assets and index S&P 500
is a big advantage in terms of the implementation because in all of the four equations
(3.79), (3.80), (3.81), and (3.82) tail copulas are estimated by the summing up of
indicator functions by certain conditions and then by division of the resulting sum by
threshold k. In case of different k for asset and index S&P 500, we would have to divide
by the mean of km,1 and km,2 . This would lead to distortion of the estimate.
To check for consistency of my results I added a small noise of amplitude (10−6 )
to all my returns that none of them were equal anymore. In this way I removed the
degeneracy evolved from the little modification described by equation (3.84). The
results remained consistent up to the decimal places that were of interest. Therefore I
can be pretty sure that there is no significant distortion caused by this modification.
Table (3.24) shows the results of tail dependence coefficients λ̂U,m , λ̂L,m , λ̂EV T
U,m , and
λ̂EV T
L,m of the index S&P 500 and the nine assets calculated for the shorter reference
period and table (3.25) for the longer reference period, both at a threshold k equal to
4% of total data m. Results achieved by adding some random noise are also shown for
comparison 16 . As mentioned I analysed exactly the same data as for the calculations
according to Sornette & Malevergne but decided not to present a version that neglects
most extreme values because with the actual approaches quantitative return data does
not affect the result, as by definition of the estimations based on the findings of Schmidt
& Stadtmüller we only consider rank vectors representing relative magnitudes within
historical return tables. Therefore extreme outliers don’t distort the results at all.
To summarize for both upper and lower tails: upper and lower Tail dependence coef-
ficients according to Schmidt & Stadtmüller were calculated by the following relations:
m
1X
λ̂L,m = 1 (j) (j) (3.85)
k j=1 Rm1 ≤k and Rm2 ≤k
m
1X
λ̂U,m = 1 (j) (j) (3.86)
k j=1 Rm1 >m−k and Rm2 >m−k
and
m
1X
λ̂EV T
L,m = 2 − 1 (j) (j) (3.87)
k j=1 Rm1 ≤k or Rm2 ≤k
m
1X
λ̂EV T
U,m = 2 − 1 (j) (j) (3.88)
k j=1 Rm1 >m−k or Rm2 >m−k
16
The matlab m-file for the implementation of λU,m , λL,m , λEV T EV T
U,m , and λL,m estimated by approaches
according to Schmidt & Stadtmüller is denoted by: Lambda Schmidt.m and enclosed to the appendix and to
the data CD
106
λ̂U,m λ̂L,m λ̂EV
U,m
T λ̂EV
L,m
T
m=2507
k 100.28 100.28 100.28 100.28
w. noise w. noise w. noise w. noise
BMY 0.19 0.19 0.21 0.21 0.18 0.19 0.22 0.21

CVX 0.18 0.17 0.20 0.20 0.17 0.17 0.21 0.20
HPQ 0.25 0.25 0.27 0.27 0.23 0.25 0.27 0.27
KO 0.27 0.26 0.23 0.23 0.25 0.26 0.23 0.23
MMM 0.16 0.15 0.24 0.24 0.15 0.15 0.24 0.24
PG 0.22 0.21 0.19 0.19 0.21 0.21 0.20 0.19
SGP 0.14 0.13 0.23 0.23 0.13 0.13 0.23 0.23
TXN 0.11 0.11 0.09 0.09 0.10 0.11 0.10 0.09
WAG 0.19 0.19 0.27 0.27 0.18 0.19 0.27 0.27
Table 3.24: Estimated values of upper and lower tail dependence for index S&P 500 and a set
of nine major assets traded on the New York stock Exchange calculated by non-parametric
approaches according to Schmidt & Stadtmüller. The tail represents the most extreme 4% of
the return values during a time interval from January 1991 to December 2000 with a threshold
value of k = 0.04 · m = 100.3. Columns denoted by ’w. noise’ correspond to columns on their
right and are performed by the same approaches but with a small random noise of amplitude
(10−6 ) added to the returns that no two returns are equal anymore.
whereas m denotes the size of the return sample i.e. number of daily observations, k
(j) (j)
again denotes the threshold typically assumed as 4% of m, and Rm1 and Rm2 with
j = 1, . . . , m represent rank ordered
Pn statistics of index returns Y (j) and asset returns
pre
R +j
X (j) calculated by: Rm,· eq
= j=1 n m,· if we have n equal return values with Rm,· eq
pre
denoting the ranks of equal returns and Rm,· denoting the rank of the return(s) previous
to the set of considered equal returns.
3.4.3 Analysis of Coefficients

Looking at equations (3.85), (3.86), (3.87), and (3.88) we can observe that λ̂U,m , λ̂L,m ,
λ̂EV T EV T
U,m , and λ̂L,m all depend on threshold k, which is an indicator of what is assumed
to represent the extreme tail of a certain data set. In our result tables, table (3.24)
and table (3.25) we assumed the most extreme 4 % of data ordered by increasing or
decreasing values to constitute the extreme tail. It might now be interesting to check for
sensitivity of my tail dependence coefficient estimates to different choices of threshold
k. For this purpose I plotted λ̂L,m , λ̂EV T EV T
L,m , λ̂U,m , and λ̂U,m in dependence of k on an
interval ranging from 0 % up to 6 % of total data m. Figure (3.58) shows the two plots
at the example of the nine assets for the upper tails and figure (3.59) for the lower tails.
It is interesting to observe that λ̂L,m seems to be a lower bound of λ̂EV T
L,m and λ̂U,m seems
to be a upper bound of λ̂EV T
U,m . Furthermore λ̂L,m and λ̂U,m seem to be less sensitive to
small changes of threshold k than λ̂EV T EV T
L,m and λ̂U,m . In fact when I choose step sizes
equal to my available data (low data density), that means without scaling of my x-axis
in terms of refining the k-density, then the curves of λ̂EV T
U,m and λ̂U,m become nearly
identical. This holds also for negative tails and might be an indication for the Boolean
107
λ̂U,m λ̂L,m λ̂EV
U,m
T λ̂EV
L,m
T
m=5736
k 229.40 229.40 229.40 229.40
w. noise w. noise w. noise w. noise
BMY 0.22 0.22 0.28 0.28 0.22 0.22 0.28 0.28
CVX 0.17 0.17 0.27 0.27 0.17 0.17 0.27 0.27
HPQ 0.28 0.28 0.29 0.29 0.28 0.28 0.29 0.29
KO 0.27 0.27 0.28 0.28 0.26 0.27 0.29 0.28
MMM 0.25 0.25 0.27 0.27 0.25 0.25 0.27 0.27
PG 0.19 0.19 0.20 0.20 0.19 0.19 0.20 0.20
SGP 0.17 0.17 0.26 0.26 0.17 0.17 0.27 0.26
TXN 0.17 0.17 0.16 0.16 0.17 0.17 0.17 0.16
WAG 0.21 0.21 0.29 0.29 0.20 0.21 0.29 0.29
Table 3.25: Estimated values of upper and lower tail dependence for index S&P 500 and a set
of nine major assets traded on the New York stock Exchange calculated by non-parametric
approaches according to Schmidt & Stadtmüller. The tail represents the most extreme 4%
of the return values during a time interval from July 1985 to April 2008 with a threshold
value of k = 0.04 · m = 229.4. Columns denoted by ’w. noise’ correspond to columns on their
right and are performed by the same approaches but with a small random noise of amplitude
(10−6 ) added to the returns that no two returns are equal anymore.
’or’ criterion applied to real financial data to exhibit higher fluctuations compared to
the Boolean ’and’ criterion.
108
BMY CVX HPQ
0.3 0.3 0.3
0.25 0.25 0.25

λU,m, λEVT
λU,m, λEVT
EVT
U,m
U,m
λU,m, λU,m
0.2 0.2 0.2
0.15 0.15 0.15
0.1 0.1 0.1
0.05 0.05 0.05
0 0 0
0 0.01 0.02 0.03 0.04 0.05 0.06 0 0.01 0.02 0.03 0.04 0.05 0.06 0 0.01 0.02 0.03 0.04 0.05 0.06
k/m k/m k/m
KO MMM PG
0.3 0.3 0.3

0.25 0.25 0.25
λU,m, λEVT
λU,m, λEVT
EVT
U,m
U,m
λU,m, λU,m
0.2 0.2 0.2
0.15 0.15 0.15
0.1 0.1 0.1
109
0.05 0.05 0.05

0 0 0
0 0.01 0.02 0.03 0.04 0.05 0.06 0 0.01 0.02 0.03 0.04 0.05 0.06 0 0.01 0.02 0.03 0.04 0.05 0.06
k/m k/m k/m
SGP TXN WAG
0.3 0.3 0.3

0.25 0.25 0.25
λU,m, λEVT
λU,m, λEVT
EVT
U,m
U,m
λU,m, λU,m
0.2 0.2 0.2
0.15 0.15 0.15
0.1 0.1 0.1
0.05 0.05 0.05
0 0 0
0 0.01 0.02 0.03 0.04 0.05 0.06 0 0.01 0.02 0.03 0.04 0.05 0.06 0 0.01 0.02 0.03 0.04 0.05 0.06
k/m k/m k/m
Figure 3.58: λ̂U,m for upper tails of index S&P 500 and the nine assets plotted in black and λ̂EV T
U,m for upper tails plotted in red, both in dependence
of threshold k on an interval from k/m = 0% . . . 6% for m = 2507 daily return values during a time interval ranging from January 1991 to December
2000.
BMY CVX HPQ
0.4 0.4 0.4
, λEVT
0.3 0.3 0.3
L,m
, λEVT
EVT
L,m
λL,m, λL,m
L,m
0.2 0.2 0.2
L,m
λ
λ
0.1 0.1 0.1
0 0 0
0 0.01 0.02 0.03 0.04 0.05 0.06 0 0.01 0.02 0.03 0.04 0.05 0.06 0 0.01 0.02 0.03 0.04 0.05 0.06
k/m k/m k/m
KO MMM PG
0.4 0.4 0.4
, λEVT
λL,m, λEVT
, λEVT
0.3 0.3 0.3
L,m
L,m
L,m
0.2 0.2 0.2
L,m
L,m
λ
λ
110
0.1 0.1 0.1
0 0 0
0 0.01 0.02 0.03 0.04 0.05 0.06 0 0.01 0.02 0.03 0.04 0.05 0.06 0 0.01 0.02 0.03 0.04 0.05 0.06
k/m k/m k/m
SGP TXN WAG
0.4 0.4 0.4
, λEVT
λL,m, λEVT
, λEVT
0.3 0.3 0.3
L,m
L,m
L,m
0.2 0.2 0.2
L,m
L,m
λ
λ
0.1 0.1 0.1
0 0 0
0 0.01 0.02 0.03 0.04 0.05 0.06 0 0.01 0.02 0.03 0.04 0.05 0.06 0 0.01 0.02 0.03 0.04 0.05 0.06
k/m k/m k/m
Figure 3.59: λ̂L,m for lower tails of index S&P 500 and the nine assets plotted in black and λ̂EV T
L,m for lower tails plotted in red, both in dependence
of threshold k on an interval from k/m = 0% . . . 6% for m = 2507 daily return values during a time interval ranging from January 1991 to December
2000.
Estimation of optimal Threshold k
To estimate the optimal threshold k for my tail dependence estimates according to
Schmidt & Stadtmüller it is proposed in chapter seven of paper [24] (2005) to use a
simple plateau finding algorithm after smoothing the plots of λ̂L,m (k), λ̂EV T
L,m (k), λ̂U,m (k),
and λ̂EV T
U,m (k) by some box kernel. To make the results comparable to my further
estimates, I wanted to choose a threshold value k around 4% of total data. Therefore I
first wanted to smooth out my function of estimated tail dependence in dependence of
threshold k by using a kernel with a bell-type shape and unit integral (i.e. the function
is normalized). Basically, I wanted to replace a data point by the function centered on
its abscissa times an amplitude equal to the ordinate of that data point by choosing a
Gaussian or just a window function (zero outside of an interval and constant inside the
window). The general formula of the approach is as follows:
ˆ · λ(k)
λsmoothed (k) = f(k) (3.89)
X n
ˆ = 1 k − k j
with f(k) K (3.90)
nh j=1 h
The kernel estimator fˆ with kernel K is Ra sum of boxes or ’bumps’ placed at the
∞
observations. If K satisfies the condition: −∞ K(k)dk = 1, fˆ represents a probability
density function of my estimates that weights the observations with window width h
and n denoting the number of observations.
After some tries I realized that whatever width of the filter I used, the supposedly
smooth function remained sharp toothed. The problem is that the local density of data
in my case is constant over the whole plot interval. fˆ by definition only considers values
of the x-axis for the weighting. Because these values in my case are equally distributed,
the only solution of fˆ, if the parameter of window width is adapted properly, could be
equal to 1 and therefore λsmoothed becomes equal to λ indicating that this smoothing
approach has no effect.
Therefore I think that we should choose another smoothing method: A locally
weighted scatter plot smooth using least squares quadratic polynomial fitting yielded
the best results. It has a strong smoothing effect and still leaves the plots accurate
enough. The regression weights for each data point in the span d(k) are given by the
3
k−ki 3
tricube function: wi = 1 − d(k) , whereas a second degree least squares regression
was performed:
n
X n
X
S= rj2 = wj (yj − ŷj )2 with ŷj = p1 · kj2 + p2 · kj + p3 (3.91)
j=1 j=1
Figure (3.60) shows smoothing of λ̂L,m (k) and λ̂U,m (k) for all assets and the smaller
interval and figure (3.61) for the bigger interval by setting d(k) = 0.125 of the consid-
ered interval k/m = 0% . . . 8% or in my case of constant local data density a span of
25 values (out of 2507) for the smaller sample and a span of 57 values (out of 5736)
for the bigger sample. k = 4% seems to be a good choice for the thresholds also for
estimates according to Schmidt & Stadtmüller. Most of the plots show stiff behaviour
betwenn k/m = 3% . . . 5%. Therefore and to be able to compare the results estimated
by methods according to Sornette & Malevergne I decided to stick with k = 4%.
111
0.4 0.3 0.4
0.3
0.3 0.2
0.2
λHPQ
BMY
λCVX
0.2 0.1
λ
0.1
0.1 0
0
0 −0.1 −0.1
0 0.02 0.04 0.06 0.08 0 0.02 0.04 0.06 0.08 0 0.02 0.04 0.06 0.08
k/m k/m k/m
0.35 0.3 0.4
0.3
0.2 0.3
0.25
λMMM
λKO
PG
0.1 0.2
λ
0.2
0 0.1
0.15
112
0.1 −0.1 0
0 0.02 0.04 0.06 0.08 0 0.02 0.04 0.06 0.08 0 0.02 0.04 0.06 0.08
k/m k/m k/m
0.4 0.15 0.8
0.3 0.1 0.6
WAG
SGP
λTXN
0.2 0.05 0.4

λ
λ
0.1 0 0.2
0 −0.05 0
0 0.02 0.04 0.06 0.08 0 0.02 0.04 0.06 0.08 0 0.02 0.04 0.06 0.08
k/m k/m k/m
Figure 3.60: Smoothed λ̂L,m plotted in black and smoothed λ̂U,m plotted in green for the nine assets with the index S&P 500 given for the most
extreme 8% during a time interval from January 1991 to December 2000. Smoothing is performed by locally weighted scatter plot smooth using
least squares quadratic polynomial fitting filters with 25 considered data points by step or [0.125 · 0.08 · m] values with a total of m = 2507 data
points and [·] denoting integer numbers.
0.4 0.3 0.4
0.25
0.3 0.3
0.2
HPQ
BMY
λCVX
0.2 0.2
λ
λ
0.15
0.1 0.1
0.1
0 0.05 0
0 0.02 0.04 0.06 0.08 0 0.02 0.04 0.06 0.08 0 0.02 0.04 0.06 0.08
k/m k/m k/m
0.35 0.4 0.3
0.3 0.3
0.2
0.25 0.2
λMMM
λKO
λPG
0.1
0.2 0.1
0
0.15 0
113
0.1 −0.1 −0.1

0 0.02 0.04 0.06 0.08 0 0.02 0.04 0.06 0.08 0 0.02 0.04 0.06 0.08
k/m k/m k/m
0.4 0.2 0.4
0.3 0.15
0.3
0.2 0.1
WAG
SGP
λTXN
0.2
λ
λ
0.1 0.05
0.1
0 0
−0.1 −0.05 0
0 0.02 0.04 0.06 0.08 0 0.02 0.04 0.06 0.08 0 0.02 0.04 0.06 0.08
k/m k/m k/m
Figure 3.61: Smoothed λ̂L,m plotted in black and smoothed λ̂U,m plotted in green for the nine assets with the index S&P 500 given for the most
extreme 8% during a time interval from July 1985 to April 2008. Smoothing is performed by locally weighted scatter plot smooth using least
squares quadratic polynomial fitting filters with 57 considered data points by step or [0.125 · 0.08 · m] values with a total of m = 5736 data points
and [·] denoting integer numbers.
1 0.2
λ 2
σ
L L
0.9 0.18
0.8 0.16
0.7 0.14
0.6 0.12
0.5 0.1
0.4 0.08
0.3 0.06
0.2 0.04
0.1 0.02
0 0
0 1 2 3 4 5 6 7 8 0 1 2 3 4 5 6 7 8
θ θ
Figure 3.62: Lower tail dependence λL (θ) = 2−1/θ and corresponding asymptotic variance
σL2 (θ) = 2−1/θ − 23 4−1/θ + 12 8−1/θ for the Pareto copula.

Schmidt & Stadtmüller proposed in chapter (5) of paper [24] (2005) a method to ap-
proximate the unknown asymptotic variance of tail dependence estimates obtained by
their methods. They choose the Pareto copula as a simple but flexible parametric cop-
ula, calculated its tail copula, and utilized the corresponding variance functional σL2 (θ)
as an approximation of the unknown asymptotic variance. The tail copula of the Pareto
copula is given by:

C(u, v) = max [u−θ + v −θ − 1]−1/θ , 0 , θ ∈ [−1, ∞) \ 0.
Further the lower tail copula exists for θ > 0 and can be expressed by:
ΛL(x, y) = (x−θ + y −θ )−1/θ .
The asymptotic variance was given by:

3 1
σL2 (θ) = 2−1/θ − 4−1/θ + 8−1/θ , (3.92)
2 2
where θ was replaced by the maximum likelihood estimator θ̂.
It can be shown that the Pareto copula is lower tail dependent with lower tail
dependence coefficient λL = ΛL (1, 1) = 2−1/θ for θ > 0, (i.e. page 77 of paper [28]
(2008)). Given our estimated results of λ̂U,m and λ̂EV T 2
U,m , σL (θ̂) can be calculated. Figure
2
(3.62) shows plots of λL (θ) and σL (θ).
Looking at the result table for my tail dependence estimates according to Schmidt &
Stadtmüller in tables (3.24) and (3.25) we observe that all of the estimates are between
log(2)
0.1 and 0.3, which yields θ̂ = − log{λ∈(0.1,0.3)} ∈ (0.3, 0.6) and finally σL2 (θ̂) ∈ (0.08, 0.18).
114
The right hand side of figure (3.62) shows that this is exactly the area where σL2 (θ)
peaks. To achieve results of higher accuracy, meaning that the variance functional
σL2 (θ̂) becomes lower, we would need very high estimates of lower tail dependence
coefficients λ̂L,m . Even if our estimates were around 0.7 we would still calculate standard
deviations of around 50% of the estimates by the variance functional. This, as we will
see shortly, would still be about twice the amount of bootstrap sampling standard
deviation estimates. Therefore I don’t think that this approximation approach has
meaningful appliance to my data.
Now I come to the estimation of error bars by the bootstrap method. I built boot-
strap samples of S&P 500 index return data Y1,m , Y2,m, . . . , Ym,m , where m denotes the
total number of values, and searched for the asset return data corresponding in time.
For the smaller sample consisting of m = 2507 data points I built 1000 bootstrap sam-
ples and for the bigger sample consisting of m = 5736 data points I built 800 bootstrap
samples because this already required considerable computing power. Table (3.26)
shows results of bootstrap sampling for the smaller data set and table (3.27) shows the
results for the bigger data set 17 .
Relative errors of the mean values of bootstrap sample estimates compared to original
sample estimates denoted by ’rel err’ were small for each asset by both approaches λ̂
and λEV ˆ T : the biggest relative error was calculated for λbs,mean of the upper tail of
asset Minnesota Mining & MFG (MMM) shown in table (3.26) for smaller sample
bootstrap estimates. It showed 12 % relative deviation from the real value. Performing
this calculation again yielded similar values. Here again the assumption of errors to
be approximately Gaussian distributed seems to hold as calculated standard deviations
within and between the different bootstrap samples are very close of being equal to
half of 95% quantiles. This holds for both sample sizes. The standard deviations
between the bootstrap sample estimates of the smaller sample were found to be around
18% up to maximally 30% of total tail dependence estimates. The lower the tail
dependence estimates the less accurate were the quantiles and standard deviations. For
the bigger sample relative deviations were significantly lower. Here standard deviations
were around 10% to 15% of total tail dependence estimates.
The results obtained by approaches according to Schmidt & Stadtmüller seem to be
very consistent. Tables (3.24) and (3.25) also show that, compared to other methods,
estimates are close to each other, whereas estimates for lower tails tend to be higher
than estimates for upper tails like it used to be the case for the non-parametric and
the parametric approach according to Sornette & Malevergne applied to the smaller
data set and using corrected ˆl and Ĉ given by ˆlc and Ĉc . This also holds for the non-
parametric approach according to Poon, Rockinger, and Tawn using corrected L̂ given
by L̂c .
17
The matlab m-file for the bootstrap sampling with replacement of λU,m , λL,m , λEV T EV T
U,m , and λL,m estimated
by approaches according to Schmidt & Stadtmüller is denoted by: bootstr Schmidt.m and enclosed to the data
CD
115
m=2507 bs=1000
λbs,mean λbs,mean
λ·,m k=100.28 rel err max dev 95% q 90% q std bs k=100.28 rel err max dev 95% q 90% q std bs
BMY 0.20 0.03 0.11 0.07 0.06 0.04 0.21 0.00 0.19 0.08 0.07 0.04
CVX 0.18 0.01 0.09 0.08 0.06 0.04 0.19 0.02 0.20 0.07 0.06 0.04
HPQ 0.25 0.01 0.10 0.08 0.07 0.04 0.27 0.00 0.09 0.08 0.07 0.04
KO 0.26 0.05 0.19 0.08 0.07 0.04 0.22 0.02 0.10 0.08 0.07 0.04
MMM 0.17 0.08 0.08 0.08 0.07 0.04 0.24 0.00 0.11 0.08 0.06 0.04
PG 0.21 0.03 0.11 0.08 0.06 0.04 0.19 0.00 0.12 0.07 0.06 0.04
SGP 0.14 0.02 0.10 0.07 0.06 0.04 0.23 0.02 0.09 0.08 0.06 0.04
TXN 0.11 0.01 0.07 0.06 0.05 0.03 0.09 0.04 0.08 0.05 0.05 0.03
WAG 0.18 0.04 0.10 0.08 0.06 0.04 0.27 0.01 0.12 0.08 0.07 0.04
116
λEV
·,m
T
BMY 0.19 0.06 0.12 0.07 0.06 0.04 0.22 0.02 0.11 0.08 0.07 0.04
CVX 0.17 0.02 0.10 0.08 0.07 0.04 0.20 0.00 0.09 0.07 0.06 0.04
HPQ 0.24 0.02 0.09 0.08 0.07 0.04 0.28 0.01 0.10 0.08 0.07 0.04
KO 0.25 0.04 0.20 0.08 0.07 0.04 0.23 0.00 0.11 0.08 0.07 0.04
MMM 0.16 0.12 0.11 0.08 0.07 0.04 0.25 0.02 0.12 0.07 0.06 0.04
PG 0.20 0.01 0.12 0.08 0.06 0.04 0.20 0.02 0.08 0.07 0.06 0.04
SGP 0.13 0.06 0.10 0.07 0.06 0.04 0.24 0.04 0.17 0.08 0.06 0.04
TXN 0.10 0.03 0.09 0.06 0.05 0.03 0.10 0.08 0.10 0.06 0.05 0.03
WAG 0.17 0.01 0.10 0.08 0.07 0.04 0.28 0.02 0.13 0.09 0.07 0.04
Table 3.26: Establishing the uncertainty of non-parametrically estimated upper tail dependence coefficients λ̂U,m and λ̂EV T
U,m and lower tail depen-
dence coefficients λ̂L,m and λ̂EV T
L,m by creating 1000 bootstrap samples of historical return data tables for S&P 500 index and corresponding asset
returns and calculation of quantiles, extreme values, and standard deviations of the results. The tails represent the most extreme 4% of the return
values during a time interval from January 1991 to December 2000.
m=5736 bs=800
λbs,mean λbs,mean
λ·,m k=229.40 rel err max dev 95% q 90% q std bs k=229.40 rel err max dev 95% q 90% q std bs
BMY 0.22 0.01 0.07 0.05 0.04 0.02 0.28 0.00 0.10 0.06 0.05 0.03
CVX 0.18 0.03 0.09 0.05 0.04 0.02 0.27 0.01 0.09 0.06 0.05 0.03
HPQ 0.28 0.01 0.10 0.05 0.04 0.03 0.28 0.02 0.10 0.05 0.04 0.03
KO 0.27 0.03 0.11 0.06 0.05 0.03 0.29 0.02 0.08 0.05 0.04 0.03
MMM 0.25 0.02 0.09 0.05 0.04 0.03 0.26 0.01 0.09 0.05 0.04 0.03
PG 0.20 0.02 0.09 0.05 0.04 0.03 0.20 0.01 0.09 0.05 0.04 0.02
SGP 0.17 0.02 0.08 0.05 0.04 0.02 0.26 0.00 0.09 0.05 0.05 0.03
TXN 0.17 0.00 0.07 0.05 0.04 0.02 0.16 0.02 0.07 0.05 0.04 0.02
WAG 0.21 0.01 0.08 0.05 0.04 0.03 0.28 0.03 0.10 0.06 0.05 0.03
117
λEV
·,m
T
BMY 0.22 0.00 0.08 0.05 0.04 0.03 0.28 0.01 0.10 0.06 0.05 0.03
CVX 0.17 0.04 0.08 0.05 0.04 0.02 0.27 0.00 0.09 0.06 0.05 0.03
HPQ 0.28 0.01 0.09 0.05 0.05 0.03 0.29 0.01 0.11 0.05 0.04 0.03
KO 0.27 0.04 0.10 0.06 0.05 0.03 0.29 0.02 0.08 0.05 0.05 0.03
MMM 0.24 0.01 0.09 0.05 0.04 0.03 0.27 0.00 0.09 0.05 0.04 0.03
PG 0.19 0.03 0.09 0.05 0.04 0.03 0.20 0.00 0.09 0.05 0.04 0.03
SGP 0.17 0.01 0.08 0.05 0.04 0.02 0.27 0.00 0.09 0.05 0.05 0.03
TXN 0.17 0.01 0.07 0.05 0.04 0.02 0.16 0.00 0.07 0.05 0.04 0.02
WAG 0.21 0.02 0.08 0.05 0.04 0.03 0.29 0.02 0.09 0.06 0.05 0.03
Table 3.27: Establishing the uncertainty of non-parametrically estimated upper tail dependence coefficients λ̂U,m and λ̂EV T
U,m and lower tail depen-
dence coefficients λ̂L,m and λ̂EV T
L,m by creating 800 bootstrap samples of historical return data tables for S&P 500 index and corresponding asset
returns and calculation of quantiles, extreme values, and standard deviations of the results. The tails represent the most extreme 4% of the return
values during a time interval from July 1985 to April 2008.
I also implemented the rolling horizon time window to the Schmidt & Stadtmüller
estimator for the three window sizes S = 2500, S = 1600, and S = 800. Figures (3.63),
(3.64), and (3.65) show the results. We can see that for most of the time left-tail
dependence λ̂L,m plotted in black dominates right-tail dependence λ̂U,m given in green.
The bigger the time window, the more obvious this becomes. In terms of trends it is
difficult to draw conclusion because plots for different window sizes look a little different
from each other. Assuming that plots with window size S = 2500 given in figure (3.63)
represent something like a smoothed version of the other plots with smaller window
sizes we get the impression that tail dependence for both positive and negative tails
have become remarkably constant recently. Comparing the right part of the plots,
representing estimates from 1985 to 1995, to the left part of the plots, representing
estimates from 2000 to 2008, the left side is more fluctuating than the right side. For
most assets it is also this area, where λ̂L,m grows clearly beyond λ̂U,m . It is not clear
whether there is in general a decreasing or an increasing tendency of λ̂L,m and λ̂U,m .
Also here asset Texas Instruments inc. (TXN) looks different from the others as it
shows a clear increasing trend over time. Overall it is remarkable how consistent most
of the assets remain over time. Except asset TXN, all assets are fluctuating around a
constant value. Even if we look at figure (3.65), which shows estimates for the smallest
windows of size S = 800 fluctuations remain limited. This was not the case for i.e. first
and second β-smile conditions.
Error Bars in Dependence of Time

To establish uncertainty of estimated upper and lower tail dependence estimates in
dependence of time I performed bootstrap sampling for the rolling time windows 18 .
Therefore I used a window size of S = 1600. The Schmidt and Stadtmüller approaches
request the highest computing power of all implemented concepts.
Because bootstrap estimates showed good accuracy I think that S = 1600 daily ob-
servations per estimate is enough for this approach. Results provided on the data CD
show that bootstrap quantiles remain stable and low enough for the chosen window
size. 95% quantiles are around 40% to 50% of total estimates for upper and lower tails
of most assets. This yields standard deviations around 20% to 25% of the estimates,
which is comparably low. λ̂EV T EV T
L,m and λ̂U,m perform similarly to λ̂L,m and λ̂U,m in terms
of bootstrap quantile estimations.
18
Results of bootstrap sampling of the rolling time window estimates for λU,m , λL,m , λEV T EV T
U,m , and λL,m and
window size of S = 1600 data points can be observed on the data CD submitted with the thesis in the folder:
window results
118
BMY CVX HPQ
0.35 0.35 0.32
0.3 0.3 0.3
0.28
0.25 0.25
0.26
λ
λ
0.2 0.2
0.24
0.15 0.15 0.22
0.1 0.1 0.2

2500 3000 3500 4000 4500 5000 5500 6000 2500 3000 3500 4000 4500 5000 5500 6000 2500 3000 3500 4000 4500 5000 5500 6000
m m m
KO MMM PG
0.5 0.5 0.35
0.3
0.4 0.4
0.25
0.3 0.3
λ
λ
0.2
0.2 0.2
0.15
119
0.1 0.1 0.1

2500 3000 3500 4000 4500 5000 5500 6000 2500 3000 3500 4000 4500 5000 5500 6000 2500 3000 3500 4000 4500 5000 5500 6000
m m m
SGP TXN WAG
0.35 0.2 0.5
0.3
0.15 0.4
0.25
0.1 0.3
λ
λ
0.2
0.05 0.2
0.15
0.1 0 0.1
2500 3000 3500 4000 4500 5000 5500 6000 2500 3000 3500 4000 4500 5000 5500 6000 2500 3000 3500 4000 4500 5000 5500 6000
m m m
Figure 3.63: λU,m (m) for upper tails of index S&P 500 and the nine assets plotted in green and λL,m (m) for lower tails plotted in black using a
P 1 Pm
non-parametric approach given by equation λ̂L,m = k1 m j=1 1R(j) ≤k and R(j) ≤k and λ̂U,m = k j=1 1R(j) >m−k and R(j) >m−k for rolling time horizon
m1 m2 m1 m2
windows of S = 2500 considered data points from N = (1 . . . S), (2 . . . S + 1), . . . , (5736 − S + 1 . . . 5736) or a total time interval from July 1985 to
Mars 2008.
BMY CVX HPQ
0.5 0.5 0.35
0.3
0.4 0.4
0.25
0.3 0.3
λ
λ
0.2
0.2 0.2
0.15
0.1 0.1 0.1

1000 2000 3000 4000 5000 6000 1000 2000 3000 4000 5000 6000 1000 2000 3000 4000 5000 6000
m m m
KO MMM PG
0.5 0.4 0.4
0.4 0.3 0.3
0.3 0.2 0.2

λ
λ
0.2 0.1 0.1
120
0.1 0 0
1000 2000 3000 4000 5000 6000 1000 2000 3000 4000 5000 6000 1000 2000 3000 4000 5000 6000
m m m
SGP TXN WAG
0.35 0.4 0.5
0.3
0.3 0.4
0.25
0.2 0.3
λ
λ
0.2
0.1 0.2
0.15
0.1 0 0.1
1000 2000 3000 4000 5000 6000 1000 2000 3000 4000 5000 6000 1000 2000 3000 4000 5000 6000
m m m
P 1 Pm
m1 m2 m1 m2
Mars 2008.
BMY CVX HPQ
0.5 0.5 0.5
0.4 0.4 0.4
0.3 0.3 0.3

λ
λ
0.2 0.2 0.2
0.1 0.1 0.1
0 0 0
0 1000 2000 3000 4000 5000 6000 0 1000 2000 3000 4000 5000 6000 0 1000 2000 3000 4000 5000 6000
m m m
KO MMM PG
0.8 0.5 0.5
0.4 0.4
0.6
0.3 0.3
0.4
λ
λ
0.2 0.2
0.2
0.1 0.1
121
0 0 0
0 1000 2000 3000 4000 5000 6000 0 1000 2000 3000 4000 5000 6000 0 1000 2000 3000 4000 5000 6000
m m m
SGP TXN WAG
0.5 0.4 0.5
0.4 0.4
0.3
0.3 0.3
0.2
λ
λ
0.2 0.2
0.1
0.1 0.1
0 0 0
0 1000 2000 3000 4000 5000 6000 0 1000 2000 3000 4000 5000 6000 0 1000 2000 3000 4000 5000 6000
m m m
P 1 Pm
m1 m2 m1 m2
Mars 2008.
BMY CVX HPQ
0.4 0.4 0.4
0.3 0.3 0.3
0.2 0.2 0.2

λ
λ
0.1 0.1 0.1
0 0 0
2500 3000 3500 4000 4500 5000 5500 6000 2500 3000 3500 4000 4500 5000 5500 6000 2500 3000 3500 4000 4500 5000 5500 6000
m m m
KO MMM PG
0.5 0.4 0.5
0.4 0.4
0.3
0.3 0.3
0.2
λ
λ
0.2 0.2
0.1
0.1 0.1
122
0 0 0
2500 3000 3500 4000 4500 5000 5500 6000 2500 3000 3500 4000 4500 5000 5500 6000 2500 3000 3500 4000 4500 5000 5500 6000
m m m
SGP TXN WAG
0.5 0.4 0.4
0.4
0.3 0.3
0.3
0.2 0.2
λ
λ
0.2
0.1 0.1
0.1
0 0 0
2500 3000 3500 4000 4500 5000 5500 6000 2500 3000 3500 4000 4500 5000 5500 6000 2500 3000 3500 4000 4500 5000 5500 6000
m m m
Figure 3.66: λL,m (N ) for lower tails of index S&P 500 and the nine assets for rolling time horizon windows of size S = 2500 plotted in blue,
P
S = 1600 plotted in green, and S = 800 plotted in red using a non-parametric approach given by equation λ̂U,m = k1 m j=1 1R(j) >m−k and R(j) >m−k
m1 m2
from N = (2501 − S . . . S), (2502 . . . S + 1), . . . , (5736 − S + 1 . . . 5736).
BMY CVX HPQ
0.5 0.5 0.4
0.4 0.4
0.3
0.3 0.3
0.2
λ
λ
0.2 0.2
0.1
0.1 0.1
0 0 0
2500 3000 3500 4000 4500 5000 5500 6000 2500 3000 3500 4000 4500 5000 5500 6000 2500 3000 3500 4000 4500 5000 5500 6000
m m m
KO MMM PG
0.5 0.5 0.4
0.4
0.4 0.3
0.3
0.3 0.2
λ
λ
0.2
0.2 0.1
0.1
123
0 0.1 0
2500 3000 3500 4000 4500 5000 5500 6000 2500 3000 3500 4000 4500 5000 5500 6000 2500 3000 3500 4000 4500 5000 5500 6000
m m m
SPG TXN WAG
0.4 0.4 0.5
0.4
0.3 0.3
0.3
0.2 0.2
λ
λ
0.2
0.1 0.1
0.1
0 0 0
2500 3000 3500 4000 4500 5000 5500 6000 2500 3000 3500 4000 4500 5000 5500 6000 2500 3000 3500 4000 4500 5000 5500 6000
m m m
Figure 3.67: λU,m (N ) for lower tails of index S&P 500 and the nine assets for rolling time horizon windows of size S = 2500 plotted in blue,
P
S = 1600 plotted in green, and S = 800 plotted in red a using non-parametric approach given by equation λ̂L,m = k1 m j=1 1R(j) ≤k and R(j) ≤k from
m1 m2
N = (2501 − S . . . S), (2502 . . . S + 1), . . . , (5736 − S + 1 . . . 5736).
3.5 Conclusions
Within this section I want to compare the results of the different concepts and conclude
about which approaches have more practical application and which approaches are more
of theoretical or supplemental interest.
It is interesting to observe that by the three main concepts: approaches according to
Poon, Rockinger, and Tawn with respective non-parametric upper and lower tail depen-
dence estimator denoted by χ̂, approaches according to Sornette & Malevergne with
respective parametric and non-parametric tail dependence estimators λ+,− including
β-smile improvement conditions, and approaches according to Schmidt & Stadtmüller
with respective non-parametric tail dependence estimators denoted by λL,m and λU,m
presented in this chapter all differ significantly in their results.
The estimator χ̂ that was covered in the first section (3.1) yielded results reported
in tables (3.1) and (3.2), that were all close to one. This would mean that all of our
considered assets show a nearly perfect extremal dependence with the index S&P 500
for corrected upper and lower tails. Furthermore, most of the estimates were close
together or even identical. Therefore results are not of much use. The only column
that is different from the others reports estimates for χ̂ yielded by approximations
of univariate survival functions that were estimated without correction for the most
extreme outliers for tail values with rank (1 . . . k) and k denoting the rank number of
least extreme tail value, which is somewhat questionable.
Results according to Sornette & Malevergne calculated by β̂ of the whole data set
reported in tables (3.8) and (3.10) using Hill’s estimator and reported in tables (3.9)
and (3.11) using Gabaix’s estimator are consistent, whereas parametric estimators tend
to be somewhat higher than non-parametric estimators. The only estimates where the
performance of the parametric and the non-parametric approach was significantly dif-
ferent from each other was yielded applying the parametric approach to negative tails by
approximation of corresponding tail distributions by univariate survival functions with-
out correction for the most extreme outliers, namely by tail values with rank (1 . . . k),
where k denotes the rank number of the least extreme tail values. Anyway plots of
the parametrized survival function compared to the empirical complementary cumu-
lative distribution function for the smaller data set plotted in figure (3.38) show big
differences between the two distribution functions and again call the parametrization
of survival copulas with uncorrected average values for the estimation of scale factors
ĈY and Ĉε into question. Using the bigger data set we can overcome these difficul-
ties by some extent, which can be observed in figures (3.31) and (3.33) and also in
tables (3.10) and (3.11) showing estimates for the bigger data sets. In case of both
non-parametric and parametric estimators we observe that estimates with corrected l
and corrected C, calculated for tail values with rank c . . . k excluding the most extreme
0.5%, are in most cases higher than estimates for the positive tails. Using the Gabaix
estimator shown in tables (3.11) and (3.9) differences between upper and lower tail
dependence estimates are more distinctive. This finding agrees well with previous lit-
erature. Comparing differences between tail dependence estimates for index S&P 500
and the nine assets of the smaller and the bigger data sets the estimates are consistent
in most cases. Overall, estimates between the different assets and the index are not as
close together as for χ̂, although the biggest values were estimated for assets Hewlett-
Packard Co. (HPQ) and Coca-Cola Co (KO) around 12% to 14%, which intuitively
seems very small.
β-smile estimates for the first and second SI conditions given in table (3.18) and
(3.19) sometimes were similar to the approaches using β̂ calculated by all data and
124
sometimes were significantly different. The problem here is that β̂SI are fluctuating
and show large error bars. Mostly the β-smile estimators tend to be more radical than
estimates calculated by classic β̂ in terms of yielding more extreme results (close to
one or close to zero). It might be good to have the β-smile improvement approaches
as additional indication for very low or high tail dependence coefficient estimates and
complex dependence structures but I would not trust in these estimates because of the
high error bars obtained by bootstrap sampling.
Coming to concepts according to Schmidt & Stadtmüller with results reported in
tables (3.25) and (3.24) we observe that all the estimates lie in-between the two other
concepts. They are bigger than estimates according to Sornette & Malevergne and
smaller than estimates according to Poon, Rockinger, and Tawn. Also here, lower tail
dependence estimates tend to be generally higher than tail dependence estimates of
the upper tails. Estimates are consistent for the different time windows and they are
rather close together for all assets. Studying the definition of the estimators proposed
by Schmidt & Stadtmüller we find that the dependence structure in the tails is fully
explained by the rank order of the input data. Absolute return values have no impact
on the results. That means that highly inconvenient outliers are just weighted by their
ranks and not in terms of their absolute value relative to the rest of data. This is
different to the other estimators where we always have a certain impact of the extent
of extreme outliers in terms of a proportion i.e. by ˆl in the non-parametric estimator or
in terms of a proportion of scale factors Ĉε /ĈY in the parametric approach proposed
by Sornette & Malevergne. The χ estimator uses Z, which is the minimum value of tail
distribution approximations by unit Fréchet marginals S and T of assets and index.
Now we come to the error bar estimations of the different concepts: bootstrap esti-
mates for error bars of χ̂ are given in tables (3.3) and (3.4). Looking at the smaller
sample, quantiles are much bigger in the negative tails than in the positive tails for both
uncorrected tails and tails corrected for most extreme outliers. For the bigger sample
this only counts for uncorrected tails. Anyway quantiles for corrected tails seem to be
low indicating that estimates are accurate. For uncorrectedq tails quantiles were very
2
Z k,N k(N −k)
high for some assets. Using the proposed relation σ̂ = N3
for the calculation
of error bars is only recommended for tails that are corrected for outliers because these
outliers seem to have a strong impact on the accuracy of the estimate for concepts
according to Poon, Rockinger, and Tawn.
Looking at the non-parametric and parametric approaches proposed by Sornette &
Malevergne with bootstrap estimates of error bars for smaller and bigger data sets
provided in tables (3.12) and (3.13) for the non-parametric approach and provided in
tables (3.15) and (3.16) for the parametric approach the situation looks very similarly.
Errors seem to be approximately Gaussian distributed for both parametric and non-
parametric estimators. The only thing we have to keep an eye on is that the parametric
approach seems to perform poorly with uncorrected negative tails primarily for the
smaller data set. Correcting the tails for outliers helps to achieve stable estimates. The
non-parametric approach seems to be less sensitive to outliers.
Tail dependence estimates calculated by β-smile improvement conditions perform
very poorly in terms of error bars that were estimated by bootstrap sampling with
replacement shown in tables (3.20) and (3.21), for the non-parametric approach with
β̂SI calculated by the first SI condition applied to the smaller and the bigger data sets,
and in tables (3.22) and (3.23), for the non-parametric approach with β̂SI calculated
by the second SI condition applied to the smaller and the bigger data sets. Standard
deviations ’std bs’ are mostly around the size of the estimates for both conditions.
125
Now we come to bootstrap estimates performed for the Schmidt & Stadtmüller
approaches shown in tables (3.24) and (3.25) for the smaller and the bigger data
sets. Errors seem to be approximately Gaussian distributed and consistent without
exception. Furthermore ’std bs’ seem to be comparably low for both smaller and bigger
data sets.
As a last point in this chapter I wanted to compare the rolling time window esti-
mates of the different methods: it is remarkable how similar the estimators λ̂U,m and
λ̂L,m provided by Schmidt & Stadtmüller compared to the estimators λ̂+,− provided
by Sornette & Malevergne look for some assets if we just consider the shapes of their
respective plots in dependence of time. Also the extent of movements is very similar.
The main difference seems to be that λ̂U,m and λ̂L,m generally perform on a higher
estimation level. Dynamics in dependence of time seem to be similar to λ̂+,− . λ̂+,−
estimated by SI conditions shows much stronger fluctuations than the other methods.
For the implementation part of the thesis presented in the next chapter I will pro-
vide results estimated by all the different methods to observe the impact on their
performance applying the concepts to different data sets. Anyway from this point it
seems that the non-parametric estimator by Sornette & Malevergne and the also non-
parametric estimator by Schmidt & Stadtmüller have more practical application than
the rest of the estimators because of their accuracy in terms of error bars and their
consistent performance for different time windows.
126
Chapter 4
Application of Concepts to various

Data and Purposes
After implementation of the different methods I wanted to extend the scope of this work
by applying the concepts to various data and purposes and also show some interesting
applications.
In a first step described in section (4.1), I applied the concepts to indexes from
major finance centers in the world and respective assets in a comparable way as on the
example of S&P 500 and the nine assets to gain further experience by comparing the
results. In section (4.2) I wanted to calculate tail dependence coefficient estimates for
market indexes from different countries, to find out to what extent extreme measures
depend on geographical distances, and then compare the results with tail dependence
coefficient estimates of exchange rates to check whether they accord well with each
other. Finally in section (4.3) I will implement the different approaches to synthetic
time series to find out what the best result can be. Furthermore it will show me biases
and give me the lower bounds for the errors of the different concepts.
4.1 Application to major Financial Centers in the World

I downloaded a lot of asset and index data for the implementation of the different
concepts to the major financial centers in the world. Table (4.1) shows the indexes
including abbreviations adopted from 1 and tables (4.2), (4.3), (4.4), and (4.5) give
respective assets included in the indexes plus abbreviations also adopted from Yahoo
finance. Most of the assets used for the calculations are among the stocks with the
largest capitalization within their respective indexes, whereas their weight in the indexes
should not be too high in order that dependence does not stem from their overlap with
the market factor. Anyway I tried to choose a certain spectrum of different weights
to observe the impact on the estimates 2 . A problem was that for most indexes I did
not find exact index component weights. Only exceptions were Dow Jones Industrial
Average and S&P 500 3 . One has to remember that even if I knew the exact component
weights of the indexes, they could be altering in time as I sometimes consider time
intervals covering several decades. Anyway this is primarily of high interest for my
approaches according to Sornette & Malevergne because these approaches depend on
1
http://finance.yahoo.com
2
Asset and index data is provided on the data CD
3
Information about index component weights for assets of S&P 500 and most important assets of Dow Jones
Industrial Average index is provided on: http://www.indexarb.com/indexComponentWtSwitch.html updated
on September-16-2008.
127
the regression coefficient β of the linear additive single factor model X = β · Y + ε,
which above has been found to be the crucial parameter for this type of models. If
β is small, tail dependence estimators λ̂+,− (β) are low as well and vice versa. This
has been recognized as a weakness of the model, which lead to the introduction of the
β-smile improvement conditions, where βSI (k) was calculated only by tail return data
up to threshold number k but unfortunately yielded highly volatile estimates. Using
the classic β that is calculated by all data, though yields stable solutions, focuses on
linear dependences over the whole return data range, whereas moderate return data is
weighted equally like extreme data.
First of all I defined a time interval for which I had complete data for all assets
and indexes. The biggest ’common’ time interval ranges from begin of February 2003
to end of August 2008 and contains, depending on the index of the financial center,
from 1372 data points for Mercado de Valores (MERVAL) to 1433 data points for SSE
Composite index (SSEC). Data for index Tel Aviv 100 (TA 100) and included assets
was available not till end of August 2003 but the impact on tail dependence coefficients
of the absent of these early data should be marginal. Anyway for some indexes there is
much more data available i.e. Dow Jones Industrial Average (DOW) price data starting
from January 1962 up to now consisting of more than 11’700 observations for assets
Alcoa Inc. (AA), Boeing Co. (BA), and Caterpillar Inc. (CAT) or S%P 500 price data
for assets Hewlett-Packard Co. (HPQ) and Coca-Cola Co. (KO) also starting from
January 1962 up to now consisting of more than 11’600 observations. These huge data
sets can be used to check for the consistency of the estimators over time. Anyway the
target is to be able to draw conclusions with far less data as for example by our above
described five and a half year interval from early 2003 up to now.
First I implemented the parametric and the non-parametric approaches according to
Sornette & Malevergne and already made a very unexpected finding: tail dependence
estimates for all assets and indexes outside of the U.S. were significantly smaller than
0.001. That means that their extreme dependence of the market factor would be close
to zero, what intuitively seems to be highly questionable. All the U.S. indexes instead
exhibited more or less reasonable estimates. My first idea was that maybe the market
capitalization of the chosen assets might be too small but then, performing the estimates
on assets with different known weights (assets of S&P 500 and some assets of Dow
Jones Industrial Average), I realized that the only cause of vanishing tail dependence
estimates for all but the U.S. indexes and corresponding assets were differences in
estimated β because the estimated tail dependence coefficients are very sensitive to
β calculated by the linear single factor model. If β < 0.2 λ̂+,− → 0. That means
that when we observe a low dependence of moderate changes between asset and index,
extreme dependence vanishes as well. This can be observed on table (4.6), which shows
results for parametric and non-parametric λ̂+,− for a data set consisting of N = 2000
daily returns of index S%P 500 and assets with different component weights denoted
by ’C.W.’.
I also observed on index S&P 500 that assets, which have a low weight in the index
(< 0.5%) tend to have smaller β and therefore low λ̂+,− . What is interesting now
is that this is no longer the case if we calculate βSI (k) by SI conditions: estimates
of λ+,− that were close to zero when we use β of the whole sample could become
significantly higher than zero when calculated using βSI calculated by first or second
β-smile conditions. This can be observed in table (4.7) on the same data set as above
consisting of N = 2000 data points for index S&P 500 and corresponding assets and
would imply that assets that overall have a very low tendency to move simultaneously
128
with the index can have much stronger dependence in their extreme tails.
Additionally, I performed bootstrap sampling with replacement of my biggest data
sets up to 11’640 data points to find out whether the estimates become more accurate if
we boost the data sets. The relative errors between the results of the original sample and
the means of all bootstrap samples became small but the standard deviations between
the samples for all my estimates were still precisely of the size of the estimates for both
the first and the second SI conditions. For comparison I added the results of the tail
dependence estimates of the other U.S indexes Dow Jones Industrial Average (DOW)
and respective assets included in table (4.8) for the parametric and non-parametric
approaches with β calculated by all data and in table (4.9) for the non-parametric
approach with βSI only calculated for tail data. NASDAQ Composite (NASDAQ) and
respective assets are included in table (4.10) for both, β calculated by all data and βSI .
The data sets also consists of N = 2000 data points, which has been identified to be
the smallest size to provide stable estimates for the approaches according to Sornette &
Malevergne. Assets with biggest weights in the NASDAQ Composite Index are i.e. Mi-
crosoft Corp. (MSFT) with around 9%, Intel Corp. (INTC) with around 6%, and Cisco
Systems Inc. (CSCO) with around 5.4% but as mentioned, unfortunately I couldn’t
access more precise data. Error bar results of bootstrap sampling with replacement for
the indexes Dow Jones Industrial Average (DOW) and NASDAQ Composite (NAS-
DAQ) were fully consistent with my S%P 500 results presented in subsections (3.2.3)
and (3.2.5).
Now I come to the other approaches according to Poon, Rockinger, and Tawn and
according to Schmidt & Stadtmüller. In table (4.11) I show results at the example of
Australian Securities Exchange index (AORD) and corresponding assets for the com-
mon data samples ranging from begin of February 2003 to end of August 2008 and
consisting of N = 1398 daily return observations. That was the maximum common
interval with data available for assets and index. Table (4.12) shows estimates by the
same data but by the non-parametric approach according to Sornette & Malevergne
with first and second β-smile conditions. 95% and 90% bootstrap error quantiles show
on table (4.11) that for approaches according to Poon, Rockinger, and Tawn and ac-
cording to Schmidt & Stadtmüller errors are mostly lower than the size of the estimates
but still for many assets uncertainty in terms of error bars seems to be very high. This
is similar for all samples with less than N = 2000 data points showing us that we need
an interval of at least eight years to obtain accurate results by any of the methods
presented. The problem is that the data that is available for assets traded outside
the U.S. mostly does not go back that far in time. Anyway in most cases estimates
yielded by smaller data sets are close to estimates yielded by bigger ones but there are
some exceptions. Considering the limit of N = 2000 there are only a few assets of my
gathered sample data remaining that are traded outside the U.S.:
Australian Securities Exchange index (AORD): Billabong International Limited
(BBG) and Commonwealth Bank of Australia (CBA) with N = 2059 daily obser-
vations up to now
Financial Times Stock Exchange index (FTSE 100): United Utilities Gr. (UU)
with N = 2117 daily observations up to now
MIBTEL: Tiscali (TIS) with N = 2123 daily observations up to now
Applying Schmidt & Stadtmüller approaches to these bigger data sets yields lower
bootstrap quantiles than to the smaller data sets consisting of N = 1398 data points.
129
Index Abbrev. Country
Australian Securities Exchange (ASX) AORD Australia
CAC 40 CAC 40 France
Deutscher Aktien Index DAX Germany
Dow Jones Industrial Average DOW U.S.
Financial Times Stock Exchange Index FTSE 100 U.K
Jakarta Composite Index JKSE Indonesia
Mercado de Valores MERVAL Argentina
MIBTEL MIBTEL Italy
NASDAQ Composite NASDAQ U.S.
Swiss Market Index SMI Swiss
SSE Composite Index SSEC China
Tel Aviv 100 TA 100 Israel
Table 4.1: Indexes that were used for the implementation of the different concepts given by
their name, further used abbreviation, and country of origin.
This is fully consistent with my bootstrap sampling estimates for the two reference data
sets of S&P 500 presented in subsection (3.4.3).
Applying approaches according to Poon, Rockinger and Tawn with tail dependence
coefficient given by χ+,− , estimates sometimes yield lower bootstrap quantiles but for
several assets i.e. Commonwealth Bank of Australia (CBA) errors remain high. This is
also consistent with my further results presented in subsection (3.1.2), where bootstrap
error bars for the different assets included in the index S&P 500 were also inconsistent.
130
Index Asset Abbrev.
AORD Australian Agricultural Company Limited AAC
Abacus Property Group ABP
AGL Energy Limited AGK
Asciano Group AIO
Axa Asia Pacific Holdings Limited AXA
Billabong International Limited BBG
Bioral Limited BLD
Commonwealth Bank of Australia CBA
Centennial Coal Company Limited CEY
CSR Limited CSR
Futuris Corporation Limited FCL
Ing Industrial Fund IIF
Macquarie Office Trust MOF
Newcrest Mining Limited NCM
Nido Petroleum Limited NDO
CAC Alstom ALO
Michelin ML
EDF EDF
Peugeot UG
L’Oreal OR
France Telecom FTE
Sanofi-Aventis SAN
Alcatel-Lucent ALU
PPR PP
Renault RNO
DAX Adidas ADS
Bayer BAY
Deutsche Bank N DBK
Hypo Real Estate HRX
Linde LIN
Metro MEO
Merck MRK
Munich Re Group MUV2
SAP SAP
Siemens SIE
Tui TUI1
Table 4.2: Assets included in indexes ’AORD’ (ASX), ’CAC 40’, and ’DAX’ that were used for
the implementation of the different concepts given by their name, further used abbreviation,
and country of origin.
131
Index Asset Abbrev. Comp. Weight
DOW Alcoa Inc. AA 1.95%
American Int’l. Group AIG 0.28%
Boeing Co. BA 4.54%
Caterpillar Inc. CAT 4.77%
General Motors GM 0.80%
The Home Depot Inc. HD 2.03%
Honeywell International Inc. HON -
Intel Corporation INTC 1.43%
Johnson and Johnson JNJ 5.14%
Mc Donald’s MCD 4.73%
Wal Mart Stores Inc. WMT 4.58%
Exxon Mobil Corp. XOM 5.63%
FTSE 100 Anglo American AAL
Aviva AV
Bae Systems BA
Barclays BARC
British American Tobacco BATS
BG Group BG
Cable and Wireless CW
Glaxo Smith Klein GSK
International Power IPR
Lonmin LMI
Tui Travel TT
United Utilities Gr. UU
JKSE Astra Agro Lestari Tbk AALI
Tiga Pilar Sejahtera Food Tbk AISA
AKR Corporindo Tbk AKRA
Aneka Tambam Tbk ANTM
Bank Rakyat Indonesia BBRI
Bank Mandiri Tbk BMRI
Central Proteinaprima Tbk CPRO
Gozco Plantations Tbk GZCO
Hexindo Adiperkasa Tbk HEXA
Laguna Cipta Griya Tbk LCGP
Sampoerna Agro Tbk SGRO
Sorini Agro Asia Corporindo SOBI
Table 4.3: Assets included in indexes ’DOW’ (Dow Jones), ’FTSE 100’, and ’JKSE’ that
were used for the implementation of the different concepts given by their name, further used
abbreviation, and country of origin.
132
Index Asset Abbrev.
MERVAL Acindar-Escriturales ACIN
Petrobras Ordinarias APBR
Cresud CRES
Siderar ’A’ Voto Escri ERAR
Irsa Investments and Representations Inc. IRSA
Mirgor-Ord.Esc MIRG
MIBTEL Ascopiave ASC
Alitalia AZA
Benetton Group BEN
Buzzi Unicem BZU
Banca Carige CRG
Ducati Motor Hold. DMH
Eni ENI
Mediobanca MB
Milano Ass. MI
Risanamento RN
ST Microelectronics STM
Tiscali TIS
Terna TRN
NASDAQ Composite Apple Inc. AAPL
Abraxis BioScience Inc. ABII
Alliance Bankshare Corporation ABVA
Cephalon Inc. CEPH
Cico Systems Inc. CSCO
Henry Schein Inc. HSIC
Intel Corporation INTC
Microsoft Corporation MSFT
On Semiconductor Corp. ONNN
Pacific Ethanol Inc. PEIX
Perry Ellis International Inc. PERY
Power Shares QQQ QQQQ
SMI Julius Baer Holding N BAER
Adecco N ADEN
Ciba Holding N CIBN
The Swatch Group UHR
Zurich finl. Services ZURN
Syngenta N SYNN
Swiss Re N RUKN
Holcim N HOLN
Richemont Units A CFR
Table 4.4: Assets included in indexes ’MERVAL’, ’MIBTEL’, ’NASDAQ’, and ’SMI’ that
were used for the implementation of the different concepts given by their name, further used
abbreviation, and country of origin.
133
Index Asset Abbrev. Comp. Weight
S&P 500 Bristol-Myers Squibb Co. BMY 0.40%
Chevron CVX 1.59%
Hewlett-Packard Co. HPQ 1.12%
Coca-Cola Co. KO 1.03%
3M MMM 0.46%
Procter and Gamble Co. PG 2.07%
Schering-Plough Corp. SGP 1.12%
Texas Instruments Inc. TXN 0.28%
Walgreen Co. WAG 0.31%
new assets:
Citygroup C 0.81%
McDonalds MCD 0.69%
Occidental Petroleum OXY 0.54%
Dell DE 0.30%
PNC Financial Services PNC 0.25%
Noble Energy Inc. NBL 0.10%
Parker-Hannifin PH 0.09%
SSEC Northeast Express 600003
Anhui Expressway 600012
Henan Zhongyuan Ex 600020
Shanghai Electricity Power 600021
Jinan Iron and Steel 600022
Huadian Power International 600027
Hubai Chutian Expr. 600035
CNTIC Trading 600056
Minmetals Development 600058
Zhengzhou Yutong 600066
TA 100 AFR-ISR INV ILS AFIL
Alony Hetz PTY and I ALHE
Audiocodes AUDC
Cellcom Israel CEL
Global Industries Ltd. GLOB
HSG and Constr. Holding HUCN
Nice Systems NICE
Scailex Corp. SCIX
Table 4.5: Assets included in indexes ’S&P 500’, ’SSEC’, and ’TA 100’ that were used for
the implementation of the different concepts given by their name, further used abbreviation,
and country of origin. Additional assets included in index S&P 500 that were not part of the
reference samples presented in chapter (3) are listed below ’new assets’.
134
C. W. β Non-Par Par
ν̂ 3.16 3.69 3.16 3.69 3.16 3.69 3.16 3.69
tail 1...k 1...k c...k c...k 1...k 1...k c...k c...k
λ̂
BMY 0.40% 0.52 0.03 0.01 0.03 0.01 0.03 0.01 0.03 0.01
CVX 1.59% 0.46 0.06 0.01 0.06 0.02 0.07 0.00 0.07 0.03
HPQ 1.12% 1.07 0.07 0.04 0.07 0.05 0.10 0.02 0.10 0.07
KO 1.03% 0.33 0.02 0.01 0.02 0.01 0.02 0.01 0.02 0.01
MMM 0.46% 0.58 0.08 0.03 0.08 0.05 0.10 0.00 0.11 0.08
PG 2.07% 0.25 0.01 0.00 0.01 0.00 0.01 0.00 0.01 0.00
SGP 1.12% 0.51 0.02 0.00 0.02 0.00 0.02 0.00 0.02 0.01
TXN 0.28% 0.87 0.01 0.01 0.02 0.01 0.02 0.00 0.02 0.01
WAG 0.31% 0.48 0.03 0.01 0.03 0.01 0.03 0.01 0.03 0.02
MCD 0.69% 0.01 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
C 0.81% 0.04 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
OXY 0.54% 0.06 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
DE 0.30% -0.11 0.00* 0.00* 0.00* 0.00* 0.00* 0.00* 0.00* 0.00*
PNC 0.25% 0.16 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
NBL 0.10% 0.09 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
PH 0.09% 0.22 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Table 4.6: Estimated upper and lower tail dependence λ̂+,− applying the non-parametric and
parametric approaches according to Sornette & Malevergne to index S&P 500 and 16 assets
included in dependence of their component weights in the index denoted by ’C.W.’ and β.
The data samples contain N = 2000 daily price observations on a range from 12.04.2000
to 31.03.2008. Tail index ν̂ was calculated using Hill’s estimator, k = 0.04 · N = 80, c =
0.005 · N = 10, and ∗ denotes negative β̂.
135
+ + − +
C. W. β βSI1 Cond. 1 βSI2 Cond. 2 βSI1 Cond. 1 βSI2 Cond. 2
up up up up lo lo lo lo
ν̂ 3.16 3.16 3.16 3.16 3.69 3.69 3.69 3.69
tail 1...k c...k 1...k c...k 1...k c...k 1...k c...k
λ̂
BMY 0.40% 0.52 0.19 0.00 0.00 -0.34 0.00* 0.00* -0.26 0.00* 0.00* 0.92 0.06 0.08
CVX 1.59% 0.46 0.35 0.03 0.02 -0.20 0.00* 0.00* -0.23 0.00* 0.00* 0.79 0.11 0.16
HPQ 1.12% 1.07 1.25 0.11 0.11 2.04 0.51 0.54 -0.16 0.00* 0.00* 0.13 0.00 0.00
KO 1.03% 0.33 0.51 0.07 0.07 0.42 0.04 0.04 0.11 0.00 0.00 0.60 0.07 0.07
MMM 0.46% 0.58 0.81 0.23 0.24 0.78 0.21 0.22 0.43 0.01 0.02 1.19 0.46 0.70
PG 2.07% 0.25 0.12 0.00 0.00 0.04 0.00 0.00 1.59 1.00 1.00 1.06 0.44 0.77
SGP 1.12% 0.51 -0.20 0.00* 0.00* -0.01 0.00* 0.00* 0.09 0.00 0.00 0.84 0.02 0.03
TXN 0.28% 0.87 1.75 0.14 0.14 -0.28 0.00* 0.00* 0.51 0.00 0.00 0.24 0.00 0.00
WAG 0.31% 0.48 0.66 0.07 0.08 -0.03 0.00* 0.00* 0.30 0.00 0.00 1.06 0.21 0.24
136
MCD 0.69% 0.01 1.84 1.00 1.00 -0.62 0.00* 0.00* -0.69 0.00* 0.00* 0.14 0.00 0.00
C 0.81% 0.04 -0.06 0.00* 0.00* -0.53 0.00* 0.00* 5.45 1.00 1.00 0.13 0.00 0.00
OXY 0.54% 0.06 -0.72 0.00* 0.00* -0.60 0.00* 0.00* -0.51 0.00* 0.00* 0.65 0.03 0.03
DE 0.30% -0.11 -0.22 0.00* 0.00* -1.09 0.00* 0.00* -0.42 0.00* 0.00* -0.01 0.00* 0.00*
PNC 0.25% 0.16 -0.02 0.00* 0.00* 0.11 0.00 0.00 0.26 0.00 0.00 -0.01 0.00* 0.00*
NBL 0.10% 0.09 -0.80 0.00* 0.00* -0.82 0.00* 0.00* 0.77 0.04 0.04 1.15 0.16 0.16
PH 0.09% 0.22 1.20 0.30 0.31 -0.43 0.00* 0.00* 3.02 1.00 1.00 0.42 0.01 0.01
Table 4.7: Estimated upper and lower tail dependence λ̂+,− applying the non-parametric approach according to Sornette & Malevergne to index
S&P 500 and 16 assets included using βSI only calculated for the extreme tails by first and second β-smile conditions. Component weights of assets
within the index are denoted by ’C.W.’, βSI for the first and second conditions and β calculated for all data are listed to observe their impact on
the estimates. The data samples contain N = 2000 daily price observations on a time interval from 12.04.2000 to 31.03.2008. Tail index ν̂ was
calculated using Hill’s estimator. ’Cond 1’ denotes: Y ≥ Y (k) ∩ X ≥ X(k), ’Cond. 2’ denotes Y ≥ Y (k), k = 0.04 · N = 80, c = 0.005 · N = 10,
and ∗ denotes negative β̂.
C. W. β N-Par Par
ν̂ 3.15 3.84 3.15 3.84 3.15 3.84 3.15 3.84
λ̂
AA 1.95% 1.35 0.27 0.19 0.26 0.19 0.37 0.31 0.37 0.31
BA 4.54% 1.08 0.23 0.13 0.22 0.14 0.29 0.21 0.29 0.23
CAT 4.77% 1.18 0.29 0.26 0.28 0.27 0.47 0.40 0.47 0.47
GM 0.80% 1.38 0.17 0.12 0.17 0.13 0.24 0.20 0.25 0.21
HON - 1.37 0.28 0.23 0.29 0.27 0.43 0.36 0.46 0.44
JNJ 5.14% 0.51 0.08 0.05 0.07 0.05 0.08 0.05 0.08 0.07
MCD 4.73% 0.66 0.07 0.04 0.07 0.05 0.08 0.05 0.08 0.05
WMT 4.58% 0.88 0.18 0.17 0.17 0.17 0.25 0.24 0.25 0.25
XOM 5.63% 0.79 0.24 0.11 0.24 0.11 0.29 0.19 0.28 0.20
HD 2.03% 1.31 0.25 0.18 0.26 0.20 0.40 0.19 0.41 0.33
INTC 1.43% 1.59 0.21 0.12 0.21 0.14 0.33 0.17 0.34 0.23
AIG 0.28% 0.35 0.01 0.00 0.01 0.00 0.01 0.00 0.01 0.00
Table 4.8: Estimated upper and lower tail dependence λ̂+,− applying the parametric and the
non-parametric approach according to Sornette & Malevergne to index Dow Jones Industrial
Average and 12 assets included using β calculated by all data. Component weights of assets
within the index are denoted by ’C.W.’, and β calculated for all data are listed to observe
their impact on the estimates. The data samples contain N = 2000 daily price observations
on a time interval from 16.08.2000 to 31.07.2008. Tail index ν̂ was calculated using Hill’s
estimator, k = 0.04 · N = 80, and c = 0.005 · N = 10.
137
+ + − +
C. W. β βSI1 Cond. 1 βSI2 Cond. 2 βSI1 Cond. 1 βSI2 Cond. 2
up up up up lo lo lo lo
ν̂ 3.15 3.15 3.15 3.15 3.84 3.84 3.84 3.84
tail 1...k c...k 1...k c...k 1...k c...k 1...k c...k
λ̂
AA 1.95% 1.35 0.23 0.00 0.00 1.20 0.19 0.19 0.83 0.03 0.03 1.50 0.27 0.27
BA 4.54% 1.08 0.38 0.01 0.01 0.56 0.03 0.03 1.88 1.00 1.00 2.30 1.00 1.00
CAT 4.77% 1.18 0.54 0.03 0.02 1.20 0.27 0.26 0.48 0.01 0.01 0.81 0.06 0.06
GM 0.80% 1.38 0.24 0.00 0.00 1.20 0.10 0.10 1.04 0.04 0.04 1.70 0.27 0.29
HON - 1.37 0.91 0.08 0.08 1.50 0.35 0.36 2.21 1.00 1.00 2.40 1.00 1.00
JNJ 5.14% 0.51 0.69 0.20 0.19 0.93 0.51 0.49 2.12 1.00 1.00 0.80 0.28 0.29
MCD 4.73% 0.66 0.08 0.00 0.00 -0.09 0.00 0.00 -0.45 0.00 0.00 0.42 0.01 0.01
138
WMT 4.58% 0.88 0.48 0.03 0.03 0.89 0.18 0.18 0.11 0.00 0.00 0.60 0.04 0.04
XOM 5.63% 0.79 0.88 0.34 0.33 0.83 0.27 0.27 0.01 0.00 0.00 0.66 0.06 0.05
HD 2.03% 1.31 0.76 0.05 0.05 1.30 0.26 0.26 1.86 0.68 0.79 2.10 1.00 1.00
INTC 1.43% 1.59 0.67 0.01 0.01 1.80 0.28 0.28 -0.08 0.00 0.00 0.49 0.00 0.00
AIG 0.28% 0.35 0.44 0.01 0.01 -0.51 0.00 0.00 -0.24 0.00 0.00 -0.17 0.00 0.00
Table 4.9: Estimated upper and lower tail dependence λ̂+,− applying the non-parametric approach according to Sornette & Malevergne to index
Dow Jones Industrial Average and 12 assets included using βSI only calculated for the extreme tails by first and second β-smile conditions.
Component weights of assets within the index denoted by ’C.W.’, βSI for the first and second conditions and β calculated for all data are listed
to observe their impact on the estimates. The data samples contain N = 2000 daily price observations on a time interval from 16.08.2000 to
31.07.2008. Tail index ν̂ was calculated using Hill’s estimator, k = 0.04 · N = 80, and c = 0.005 · N = 10.
C. W. β N-Par Par
ν̂ 2.59 3.83 2.59 3.83 2.59 3.83 2.59 3.83
λ̂
AAPL - 1.01 0.26 0.12 0.25 0.16 0.28 0.04 0.28 0.28
INTC - 1.25 0.52 0.26 0.49 0.31 0.65 0.43 0.64 0.62
MSFT - 0.85 0.41 0.26 0.40 0.29 0.50 0.49 0.50 0.57
CSCO - -0.08 0.00* 0.00* 0.00* 0.00* 0.00* 0.00* 0.00* 0.00*
CEPH - 0.34 0.02 0.00 0.02 0.00 0.02 0.00 0.02 0.00
PERY - 0.21 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
HSIC - 0.26 0.02 0.00 0.02 0.00 0.02 0.00 0.02 0.00
QQQQ - 1.12 0.87 0.63 0.86 0.62 0.96 0.99 0.96 0.99
ONNN - 0.57 0.01 0.00 0.01 0.00 0.01 0.00 0.01 0.00
+ −
λ̂ βSI1 βSI1
AAPL 0.28 -0.60 0.01 0.00* 0.01 0.00* - - - -
INTC 0.68 0.69 0.11 0.03 0.10 0.03 - - - -
MSFT 0.69 0.62 0.23 0.07 0.23 0.08 - - - -
CSCO -0.10 0.09 0.00* 0.00 0.00* 0.00 - - - -
CEPH 0.20 0.21 0.00 0.00 0.00 0.00 - - - -
PERY 1.55 0.69 0.50 0.02 0.50 0.03 - - - -
HSIC 0.58 1.46 0.15 1.00 0.14 1.00 - - - -
QQQQ 0.99 0.89 0.64 0.26 0.63 0.26 - - - -
ONNN -3.24 0.53 0.00* 0.00 0.00* 0.00 - - - -
+ −
λ̂ βSI2 βSI2
AAPL 0.38 -0.43 0.02 0.00* 0.02 0.00* - - - -
INTC 0.82 0.19 0.18 0.00 0.17 0.00 - - - -
MSFT 0.82 0.39 0.37 0.01 0.37 0.02 - - - -
CSCO -0.11 -1.00 0.00* 0.00* 0.00* 0.00* - - - -
CEPH -0.66 -0.57 0.00* 0.00* 0.00* 0.00* - - - -
PERY -0.25 -1.67 0.00* 0.00* 0.00* 0.00* - - - -
HSIC -0.15 0.34 0.00* 0.01 0.00* 0.01 - - - -
QQQQ 1.04 1.04 0.73 0.47 0.72 0.47 - - - -
ONNN -1.11 -1.84 0.00* 0.00* 0.00* 0.00* - - - -
Table 4.10: Estimated upper and lower tail dependence λ̂+,− applying the parametric and the
non-parametric approach according to Sornette & Malevergne to index NASDAQ Composite
and 9 assets included using β calculated for all data and βSI only calculated for the extreme
tails by first and second β-smile conditions. Component weights of assets within the index
denoted by ’C.W.’, βSI for the first and second conditions and β calculated for all data
are listed to observe their impact on the estimates. The data samples contain N = 2000
daily price observations on a time interval from 15.08.2000 to 31.07.2008. Tail index ν̂ was
calculated using Hill’s estimator, k = 0.04·N = 80, c = 0.005·N = 10, and ∗ denotes negative
β̂.
139
χ̂+ 95% Q 90% Q χ̂+
c 95% Q 90% Q χ̂− 95% Q 90% Q χ̂−
c 95% Q 90% Q
CBA 0.91 0.82 0.10 0.87 0.05 0.04 0.30 0.49 0.47 0.88 0.09 0.07
BBG 0.91 0.83 0.09 0.92 0.09 0.07 0.91 0.06 0.05 0.88 0.06 0.05
AAC 0.92 0.05 0.05 0.91 0.05 0.04 0.91 0.79 0.79 0.88 0.07 0.06
IIF 0.92 0.03 0.03 0.92 0.05 0.04 0.91 0.84 0.08 0.88 0.05 0.04
MOF 0.91 0.79 0.79 0.89 0.05 0.04 0.91 0.05 0.04 0.88 0.05 0.04
NCM 0.91 0.79 0.79 0.89 0.05 0.04 0.91 0.05 0.04 0.88 0.05 0.04
ABP 0.92 0.05 0.04 0.92 0.05 0.04 0.91 0.06 0.06 0.88 0.06 0.05
AGK 0.91 0.84 0.07 0.88 0.05 0.04 0.66 0.53 0.53 0.88 0.07 0.06
BLD 0.92 0.04 0.04 0.90 0.04 0.04 0.91 0.04 0.04 0.88 0.05 0.04
NDO 0.84 0.46 0.46 0.78 0.65 0.65 0.84 0.50 0.50 0.79 0.59 0.59
CEY 0.91 0.75 0.75 0.86 0.06 0.05 0.91 0.77 0.77 0.88 0.06 0.05
CSR 0.85 0.29 0.13 0.92 0.06 0.05 0.31 0.51 0.50 0.88 0.10 0.08
FCL 0.83 0.71 0.71 0.92 0.75 0.75 0.88 0.79 0.13 0.88 0.06 0.05
AXA 0.91 0.83 0.08 0.92 0.07 0.06 0.91 0.83 0.08 0.88 0.07 0.05
λ̂U,m 95% Q 90% Q λ̂EV
U,m
T 95% Q 90% Q λ̂L,m 95% Q 90% Q λ̂EV
L,m
T 95% Q 90% Q
140
CBA 0.23 0.10 0.08 0.23 0.11 0.09 0.16 0.11 0.07 0.19 0.10 0.08
BBG 0.13 0.10 0.08 0.12 0.09 0.08 0.14 0.09 0.08 0.17 0.10 0.08
AAC 0.07 0.08 0.06 0.06 0.09 0.07 0.07 0.07 0.06 0.10 0.08 0.06
IIF 0.20 0.10 0.09 0.19 0.11 0.09 0.22 0.11 0.09 0.24 0.11 0.08
MOF 0.23 0.12 0.10 0.23 0.11 0.09 0.25 0.11 0.10 0.28 0.11 0.10
NCM 0.23 0.12 0.10 0.23 0.11 0.09 0.25 0.11 0.10 0.28 0.11 0.10
ABP 0.13 0.09 0.07 0.12 0.09 0.09 0.18 0.09 0.07 0.21 0.10 0.08
AGK 0.05 0.05 0.05 0.05 0.06 0.05 0.13 0.09 0.07 0.15 0.09 0.08
BLD 0.09 0.07 0.06 0.08 0.08 0.06 0.04 0.05 0.04 0.06 0.05 0.05
NDO 0.00 0.03 0.01 0.03 0.09 0.07 0.02 0.05 0.04 0.01 0.08 0.06
CEY 0.05 0.05 0.05 0.05 0.06 0.06 0.07 0.07 0.06 0.10 0.08 0.07
CSR 0.09 0.08 0.06 0.08 0.07 0.07 0.07 0.07 0.06 0.10 0.08 0.06
FCL 0.02 0.03 0.03 0.01 0.05 0.04 0.07 0.07 0.07 0.10 0.08 0.06
AXA 0.13 0.09 0.07 0.12 0.09 0.08 0.11 0.09 0.07 0.14 0.08 0.08
Table 4.11: Estimated upper and lower tail dependence according to Poon, Rockinger, and Tawn (χ̂+ −
· , χ̂· ) in the upper part and according to
EV T
Schmidt & Stadtmüller in the lower part (λ̂·,m , λ̂·,m ) for index AORD (ASX) and 14 assets included including error bars estimated by bootstrap
sampling with replacement for bs = 1000 bootstrap samples shown next to the estimates. The data samples contain N = 1398 daily price
observations on a time interval from begin of February 2003 to end of August 2008.
λ̂+
SI1 95% Q 90% Q λ̂+
SI1,c 95% Q 90% Q λ̂−
SI1 95% Q 90% Q λ̂−
SI1,c 95% Q 90% Q
CBA 0.00 * * 0.00 * * 0.00 * * 0.00 * *
BBG 0.03 * * 0.03 * * 0.00 * * 0.00 * *
AAC 0.00 * * 0.00 * * 0.02 * * 0.02 * *
IIF 0.10 * * 0.10 * * 0.10 * * 0.10 * *
MOF 0.00 * * 0.00 * * 0.00 * * 0.00 * *
NCM 0.00 * * 0.00 * * 0.00 * * 0.00 * *
ABP 0.06 0.06 0.02 0.06 * * 0.00 * * 0.00 * *
AGK 0.00 * * 0.00 * * 0.00 * * 0.00 * *
BLD 0.44 * * 0.42 * * 0.00 * * 0.00 * *
NDO 0.00 * * 0.00 * * 0.00 * * 0.00 * *
CEY 0.05 * * 0.05 * * 0.00 * * 0.00 * *
CSR 0.91 0.58 0.58 0.90 * * 0.40 * * 0.70 * *
FCL 0.00 * * 0.00 * * 0.00 * * 0.00 * *
AXA 0.03 * * 0.03 * * 0.04 * * 0.04 * *
λ̂+
SI2 95% Q 90% Q λ̂+
SI2,c 95% Q 90% Q λ̂−
SI2 95% Q 90% Q λ̂−
SI2,c 95% Q 90% Q
141
CBA 0.00 * * 0.00 * * 0.02 * * 0.05 * *

BBG 0.01 * * 0.01 * * 0.00 * * 0.00 * *
AAC 0.00 * * 0.00 * * 0.00 * * 0.00 * *
IIF 0.28 * * 0.29 * * 0.11 * * 0.11 * *
MOF 0.12 * * 0.11 * * 0.06 * * 0.07 * *
NCM 0.12 * * 0.11 * * 0.06 * * 0.07 * *
ABP 0.02 * * 0.02 * * 0.00 * * 0.00 * *
AGK 0.00 * * 0.00 * * 0.00 * * 0.00 * *
BLD 0.00 * * 0.00 * * 0.00 * * 0.00 * *
NDO 0.00 * * 0.00 * * 0.00 * * 0.00 * *
CEY 0.00 * * 0.00 * * 0.00 * * 0.00 * *
CSR 0.00 * * 0.00 * * 0.00 * * 0.00 * *
FCL 0.00 * * 0.00 * * 0.00 * * 0.00 * *
AXA 0.00 * * 0.00 * * 0.00 * * 0.00 * *
Table 4.12: Estimated λ̂+,− applying the non-parametric approach according to Sornette & Malevergne to index AORD (ASX) and 14 assets
included using βSI only calculated for the extreme tails by first and second β-smile conditions. Error bars estimated by bootstrap sampling with
replacement for bs = 1000 bootstrap samples were large and therefore mostly denoted by *. The data samples contain N = 1398 data points from
February 2003 to end of August 2008. Tail index ν̂ was calculated using Hill’s estimator.
Abbreviation Currency exchange rate
A USD-Australian Dollar
Eur USD-Euro
GBP USD-British Pound
BrR USD-Brazilian Real
CHFR USD-Swiss Frank
CHY USD-Chinese Yuan
indoRU USD-Indonesian Rupiah
indRu USD-Indian Rupee
JPY USD-Japanese Yen
Table 4.13: Further used abbreviations of currency exchange rates that were used for the
estimation of tail dependence.
4.2 Application to Exchange Rates

I wanted to apply the different concepts to index data of different markets. Here the
advantage is that in terms of historical index prices there is much more data available
than it is the case for individual asset prices. But the problem is that the data provided
does not accord in time. Choosing a sample size of N = 2000 data points for the differ-
ent indexes, which has been shown to be the minimum sample size in order to obtain
stable estimates, already shows shifts of two months time between different indexes 4 .
Because the data is not synchronous it makes no sense to apply tail dependence.
Now I come to the application of the concepts for the estimation of tail dependence to
exchange rates of various foreign currencies with the US$. An explanation of abbrevia-
tions of different currency exchange rates is provided in table (4.13) 5 . The dependence
between different currency exchange rates is an indicator for the dependence between
different economies. The existence of a dependence between foreign exchange markets
could affect firms’ investment decisions. Knowledge of short- and long-term extreme
relations could furthermore have important implications for risk management.
For the implementation I wanted to use relatively small, preferably up-to-date data
sets. Fortunately the provided data is consistent and perfectly corresponding in time.
I choose sample sizes of N = 2000 daily observations on a time interval ranging from
20.10.2002 to 10.04.2008 for several currency exchange rates between the US$ and
major foreign currencies. Table (4.14) shows tail dependence coefficients estimated by
the non-parametric approach according to Sornette & Malevergne for the chosen time
interval. The results look quite interesting because the spectrum is large. Sometimes
dependences seem very strong and in other cases we estimate zero tail dependence.
Regarding the results intuitively, they look reasonable to me. It is interesting that
extreme changes of exchange rates of the US$ to any of the chosen currencies seem to
have no significant influence on the exchange rate of the US$ to the Chinese Yuan so
far. It looks as if the Chinese Yuan has been approximately independent of the other
currencies in terms of extreme changes up to now. The Indian Rupee shows a similar
situation. It looks as if these huge countries remained somewhat autonomic of any
other economy. Another interesting finding is that by far the strongest tail dependence
is estimated between the currency exchange rate of the US$ and the Euro and the
4
This is shown in Excel file: Index data.xls enclosed on the data CD, where several indexes are listed in
parallel
5
Data tables of daily currency exchange rates can be downloaded at FXHistory:
http://www.oanda.com/convert/fxhistory
142
exchange rate of the US$ and the Swiss Franc. This seems to be reasonable.
I also performed the estimations by the other methods for comparison. This can be
seen in table (4.15) for the χ approach according to Poon, Rockinger, and Tawn [13]
(2004) and in table (4.16) for the λ approaches according to Schmidt & Stadtmüller [24]
(2005).
Comparing the results achieved by the different methods, at first sight the results
seem very different, but again, if we take into account relative differences, table (4.14)
showing results according to Sornette & Malevergne and table (4.16) showing results
according to Schmidt & Stadtmüller make similar statements i.e. tail dependence for
currencies within Europe is larger than outside of Europe. Looking for example at
tail dependence coefficient estimates of currency exchange rates in US$ between Euro
and Swiss Frank, absolute results are nearly identical and in both tables represent
the maximum estimates achieved. Another example is the Australian $: Comparing
currency exchange rates of the Australian $ and the Euro with currency exchange rates
of the Australian $ and the British Pound and currency exchange rates of the Australian
$ and the Swiss Frank we notice that in both tables tail dependence estimates for all of
the three exchange rates are relatively high whereas estimates for the Euro are slightly
higher than for the Pound and estimates for the Pound are slightly higher than for
the Swiss Frank. The rest of the currency exchange rate estimates with the Australian
$ are significantly lower with estimates for Japanese Yen being higher than the rest.
Many more of these equivalences can be found.
Comparing the χ-approach shown in table (4.15) with results achieved by the other
two methods it is much more difficult to draw inferences because also applied to currency
exchange rates results of the χ-approach are very close together, which makes it hard
to assess differences between the estimates because differences are mostly smaller than
estimated error bars. What we notice is that for all cases χ̂ = 1 could not be rejected
and therefore it can be concluded that asymptotic dependence exists between all of the
chosen currency exchange rates. For further details we refer to section (3.1).
Although the Sornette-Malevergne factor model is not so natural for the application
to currency exchange rates because we do not expect a ’common factor’ to appear,
the results look reasonable also compared to the results yielded by the Schmidt &
Stadtmüller approaches.
143
A Eur GBP BrR CHFR CHY indoRu indRu JPY
A λ+ * 0.29 0.23 0.01 0.20 0.00 0.01 0.00 0.06
λ− 0.13 0.13 0.00 0.07 0.00 0.00 0.00 0.02
λ+
c 0.28 0.22 0.01 0.19 0.00 0.01 0.00 0.06
λ−
c 0.13 0.14 0.00 0.07 0.00 0.00 0.00 0.02
Eur λ+ * 0.33 0.00 0.77 0.00 0.00 0.00 0.11
λ− 0.46 0.00 0.71 0.00 0.00 0.00 0.10
λ+
c 0.31 0.00 0.76 0.00 0.00 0.00 0.11
λ−
c 0.46 0.00 0.71 0.00 0.00 0.00 0.11
GBP λ+ * 0.00 0.33 0.00 0.00 0.00 0.06
λ− 0.00 0.18 0.00 0.00 0.00 0.02
λ+
c 0.00 0.34 0.00 0.00 0.00 0.06
λ−
c 0.00 0.18 0.00 0.00 0.00 0.02
BrR λ+ * 0.00 0.00 0.00 0.00 0.00
λ− 0.00 0.00 0.01 0.01 0.00
λ+
c 0.00 0.00 0.00 0.00 0.00
λ−
c 0.00 0.00 0.01 0.01 0.00
CHFR λ+ * 0.00 0.00 0.00 0.19
λ− 0.00 0.00 0.00 0.12
λ+
c 0.00 0.00 0.00 0.19
λ−
c 0.00 0.00 0.00 0.12
CHY λ+ * 0.00 0.00 0.00
λ− 0.00 0.00 0.00
λ+
c 0.00 0.00 0.00
λ−
c 0.00 0.00 0.00
indoRu λ+ * 0.00 0.01
λ− 0.00 0.01
λ+
c 0.00 0.01
λ−
c 0.00 0.01
indRu λ+ * 0.01
λ− 0.00
λ+
c 0.01
λ−
c 0.00
Table 4.14: Estimated λ̂+,− applying nthe non-parametric

oν approach according to Sornette &
+,− l
Malevergne given by: λ̂ = 1/ max 1, β to exchange rates of various foreign currencies
with the US$. The tail represents the most extreme 4% of the return values during a time
interval ranging from 20.10.2002 to 10.04.2008 consisting of N = 2000 daily observations. ’c’
means that tails were corrected for 0.5% of most extreme data for the estimation of l. Tail
index ν̂ was calculated using Hill’s estimator.
144
A χ+ * 0.92 0.91 0.92 0.91 0.92 0.92 0.92 0.92
χ− 0.91 0.91 0.91 0.91 0.84 0.91 0.91 0.91
χ+
c 0.88 0.86 0.87 0.86 0.89 0.89 0.87 0.89
χ−
c 0.86 0.86 0.86 0.86 0.86 0.86 0.86 0.86
Eur χ+ * 0.91 0.92 0.91 0.92 0.92 0.92 0.92
χ− 0.91 0.91 0.91 0.84 0.91 0.91 0.91
χ+
c 0.86 0.87 0.86 0.88 0.88 0.87 0.88
χ−
c 0.86 0.86 0.86 0.86 0.86 0.86 0.86
GBP χ+ * 0.91 0.91 0.91 0.91 0.91 0.91
χ− 0.93 0.92 0.84 0.93 0.92 0.93
χ+
c 0.86 0.86 0.86 0.86 0.86 0.86
χ−
c 0.90 0.89 0.90 0.90 0.88 0.90
BrR χ+ * 0.91 0.92 0.92 0.92 0.92
χ− 0.92 0.84 0.93 0.92 0.93
χ+
c 0.86 0.87 0.87 0.87 0.87
χ−
c 0.89 0.91 0.90 0.88 0.90
CHFR χ+ * 0.91 0.91 0.91 0.91
χ− 0.84 0.92 0.92 0.92
χ+
c 0.86 0.86 0.86 0.86
χ−
c 0.89 0.89 0.88 0.89
CHY χ+ * 0.93 0.92 0.93
χ− 0.84 0.84 0.84
χ+
c 0.91 0.87 0.89
χ−
c 0.90 0.88 0.90
indoRu χ+ * 0.92 0.93
χ− 0.92 0.93
χ+
c 0.87 0.89
χ−
c 0.88 0.90
indRu χ+ * 0.92
χ− 0.92
χ+
c 0.87
χ−
c 0.88
Table 4.15: Estimated χ̂+,− applying the non-parametric approach according to Poon,
Z ·k
Rockinger, and Tawn given by: χ̂+,− = k,N N to exchange rates of various foreign currencies
with the US$. The tail represents the most extreme 4% of the return values during a time
interval ranging from 20.10.2002 to 10.04.2008 consisting of N = 2000 daily observations. ’c’
means that tails were corrected for 0.5% of most extreme data for the estimation of L. Tail
indexes ν̂ were calculated using Hill’s estimator.
145
A λU,m * 0.40 0.36 0.14 0.34 0.08 0.13 0.05 0.29
λL,m 0.41 0.33 0.10 0.43 0.04 0.13 0.15 0.26
λEV
U,m
T 0.40 0.36 0.14 0.34 0.07 0.12 0.05 0.29
λEV
L,m
T 0.44 0.35 0.12 0.45 0.06 0.15 0.17 0.29
Eur λU,m * 0.53 0.13 0.73 0.09 0.08 0.04 0.29
λL,m 0.43 0.09 0.69 0.08 0.14 0.09 0.24
λEV
U,m
T 0.52 0.12 0.72 0.09 0.07 0.04 0.29
λEV
L,m
T 0.45 0.11 0.71 0.10 0.16 0.11 0.26
GBP λU,m * 0.09 0.44 0.06 0.06 0.08 0.25
λL,m 0.08 0.43 0.06 0.09 0.09 0.26
λEV
U,m
T 0.09 0.44 0.06 0.06 0.07 0.25
λEV
L,m
T 0.10 0.45 0.09 0.11 0.11 0.29
BrR λU,m * 0.08 0.06 0.09 0.10 0.10
λL,m 0.06 0.04 0.09 0.06 0.06
λEV
U,m
T 0.07 0.06 0.09 0.10 0.10
λEV
L,m
T 0.09 0.06 0.11 0.09 0.09
CHFR λU,m * 0.08 0.10 0.05 0.36
λL,m 0.08 0.11 0.08 0.31
λEV
U,m
T 0.07 0.10 0.05 0.36
λEV
L,m
T 0.10 0.14 0.10 0.34
CHY λU,m * 0.04 0.10 0.05
λL,m 0.04 0.05 0.09
λEV
U,m
T 0.04 0.10 0.05
λEV
L,m
T 0.06 0.07 0.11
indoRu λU,m * 0.10 0.10
λL,m 0.08 0.06
λEV
U,m
T 0.10 0.10
λEV
L,m
T 0.10 0.09
indRu λU,m * 0.10
λL,m 0.11
λEV
U,m
T 0.10
λEV
L,m
T 0.14
Table 4.16: Estimated λ̂L,m , λ̂U,m , λ̂EV T EV T

L,m , and λ̂U,m applying the non-parametric approaches
according to Schmidt & Stadtmüller explained in section (3.4) to exchange rates of various
foreign currencies with the US$. The tail represents the most extreme 4% of the return values
during a time interval ranging from 20.10.2002 to 10.04.2008 consisting of N = 2000 daily
observations.
146
4.3 Application to Synthetic Time Series
To check for the bias of the parameters β̂ and tail index α̂ and to get a sense of what
the best result could be by confining resulting errors on the estimators to statistical
errors in order to find lower error bounds, I implemented the different concepts to
synthetic time series. The difficulty creating a synthetic sample on the one hand is
that it should be as simple as possible enabling me to control everything and ensuring
exact knowledge about the structure of the data and on the other hand not to simplify
the model too much because we want it to become realistic.
I approximated the real return time series by a distribution consisting of two parts:
the distribution body was modeled Gaussian and the tails up to a certain threshold were
modeled by heavy tailed distribution functions. The probability density distribution
function is given by:
(
N(µ, σ) if |y| < Yk,N
p(y) = α (4.1)
1+α
if |y| ≥ Yk,N
y
with Yk,N denoting the threshold value or the least extreme return value still counted
to the tails.
Now I will explain the implementation of the distribution 6 : First I created two
samples of N uniformly distributed random values on the interval (0, 1) denoted by
’u1’ and ’u2’, whereas N denotes the sample size. Then I sorted the two samples of
uniformly distributed random values in descending order (’u1desc’ and ’u2desc’) and
applied the inverse error function for transformation to standard normal distributed
values N(0,1) with zero mean and variance equal to one given by equation:
√
z1 = 2 · erfinv(2 · u1desc − 1) (4.2)
√
z2 = 2 · erfinv(2 · u2desc − 1) (4.3)
Now I built the tail samples by first creating four samples of Z uniformly distributed
random values on the interval (0, 1) with Z = [0.04 · N] and then transforming the
uniformly distributed tail values U(0,1) to heavy tail distributed values by applying
1
1/α
relation: 1−x to get positive tails and by multiplying the same relation by factor
(−1) for negative tails with α denoting the tail index of the heavy tails. The heavy tailed
parts where then sorted by decreasing order and scaled in a way that the least extreme
values still counted to the tails were equal to the most extreme values counted to the
body of the respective distribution. Then the tails of the standard normal distributed
samples ’u1desc’ and ’u2desc’ were replaced by the heavy tails, scaled to typical size
in order to obtain synthetic return series that are comparable to original return series,
and named Y and ε denoting vectors of index returns and idiosyncratic noise. Error
terms ε calculated for real time series were typically of similar size as respective return
values. Therefore the scaling of the two vectors Y and ε was performed equally. As
a next step asset return vector X had to be built by Y , ε, and a predefined factor
β applying the linear single factor model: X = β · Y + ε, whereas firstly the vectors
were brought back into a random sequence by uniform sampling without replacement
to avoid violation of the i.i.d (independent and identically distributed) criterion. Then
after comparison of the synthetic samples with real historic return series, concepts to
6
the m-file for the estimation of tail dependence coefficients on synthetic samples is enclosed to the appendix
and to the data CD and denoted by: synthdata all.m
147
estimate tail dependence were applied. Figure (4.1) shows non-parametric probability
density distribution functions of the real index S&P 500 and asset CVX (Chevron Corp.)
return series on a time interval ranging from July 1985 to Mars 2008 representing our
smaller reference samples and a synthetic sample created by the m-file described within
this section. Both were estimated by a Gaussian box kernel described in subsection
(3.4.3) and the data sets consist of N = 2507 daily observations. We can see that the
tails of the synthetic distribution were chosen similar to the tails of index S&P 500,
whereas some assets show a slightly different tail behavior. As we are interested in the
tails of the distributions I also plotted the distribution on a semi-log scale to the base
ten shown in figure (4.2). First of all we notice the bumps caused by the Gaussian
box kernel. The three bumps on the left that can be observed on the non-parametric
probability density distribution function of asset CVX represent the most extreme
outliers and therefore are reasonable. Looking at the non-parametric probability density
distribution function of the sample of the synthetic time series plotted in red we observe
that it lies in-between the two real data distributions. This is exactly what we intended.
The transition from the Gaussian part to the heavy tailed part of the distribution seems
to be as smooth as on the example of real time series and should not generate problems
for the calculation of tail dependence coefficient estimates. Random returns Xi and
random errors εi have the same distribution and tails modeled by the same tail index
α as it is requested for the concepts according to Sornette & Malevergne.
Implementing first the concept of non-parametric tail dependence, estimated by β
calculated for all data, to synthetic time series we determine that there is no significant
bias created by the estimation of β. This can be seen on table (4.17) showing that
the maximum bias of the β-estimator, calculated as an average value performing 1000
samples with identical inputs in dependence of the size of the original β that was pre-
defined for the synthetic samples, was always smaller than 0.5% of the original value
βorig . Additionally to show the effect on λ̂+,− of the bias created by β̂, tail dependence
estimators calculated by the original β denoted by λ̂+,− (βorig ) were compared
to tail
dependence estimators in dependence of estimated β denoted by λ̂+,− β̂all data . Only

for small λ̂+,− β̂all data the bias is significantly different from zero and reaches a max-
imum of two percent of the estimate. It has to be added that the bias is independent
of the size of the synthetic sample and that tail index α was always set equal to three
to avoid a second source of errors. An estimation of error bars is also provided in ta-
ble (4.17) by quoting standard deviations and 95% quantiles within the 1000 samples.
+,−
Standard deviations of β̂all data and λ̂ β̂all data resulting from β̂ compaired with the
95% quantiles show that errors seem to be approximately Gaussian distributed.
Using βSI calculated by β-smile conditions yields surprising results: as we can ob-
serve in table (4.18) there isno bias in the estimation of β when we apply the second
β-smile condition given by: Y ≥ Y (k) to 1000 synthetic samples with identical in-
puts in dependence of the size of the original β. This is surprising insofar as it only
counts for the second β-smile condition. The first and the third β-smile conditions both
yield β-estimates that are strongly biased. As discussed in section (3.3) we still face
the problem of wide error bars for tail dependence coefficient estimates performed by
β-smile conditions. Even if βSI 2 is not biased itself, table (4.18) shows that primarily
for small βorig we obtain a significant bias in λ̂+,− with β̂ estimated by the second β-
smile condition. Also here tail index α was always set equal to three to avoid a second
source of errors.
148
60
Fitted synthetic time series
Fitted S&P 500
Fitted asset CVX
50
40
Density
30
20
10
0
−0.2 −0.15 −0.1 −0.05 0 0.05 0.1 0.15 0.2
Data
Figure 4.1: Non-parametric probability density distribution functions of index S&P 500, assets
CVX (Chevron Corp.), and a synthetic sample estimated using a Gaussian box kernel for a
time interval of N = 2507 data points ranging from January 1991 to December 2000.
0 Fitted synthetic time series

10
Fitted S&P 500
Fitted asset CVX
−5
10
−10
10
Density
−15
10
−20
10
−25
10
−30
10
−0.8 −0.6 −0.4 −0.2 0 0.2
Data
Figure 4.2: Non-parametric probability density distribution functions of index S&P 500, assets
CVX (Chevron Corp.), and a synthetic sample plotted on a semi-log scale and estimated using
a Gaussian box kernel for a time interval of N = 2507 data points ranging from January 1991
to December 2000.
149
+,− +,−
βorig β̂all data bias rel. bias std 95% quantile λ̂ (βorig ) λ̂ (β̂all data ) bias rel. bias std 95% quantile
α=3
0.05 0.05 0.00 0.00 0.02 0.04 0.00 0.01 0.01 inf 0.10 0.01
0.10 0.10 0.00 0.00 0.02 0.03 0.00 0.00 0.00 0.00 0.00 0.00
0.20 0.20 0.00 0.00 0.02 0.03 0.01 0.01 0.00 0.01 0.00 0.00
0.30 0.30 0.00 0.00 0.01 0.01 0.02 0.02 0.00 0.02 0.01 0.01
0.40 0.40 0.00 0.00 0.02 0.03 0.05 0.05 0.00 0.00 0.01 0.02
0.50 0.50 0.00 0.00 0.02 0.03 0.09 0.09 0.00 0.00 0.01 0.03
0.60 0.60 0.00 0.00 0.02 0.03 0.13 0.13 0.00 0.00 0.02 0.04
0.70 0.70 0.00 0.00 0.02 0.03 0.18 0.18 0.00 0.00 0.03 0.04
0.80 0.80 0.00 0.00 0.02 0.04 0.23 0.23 0.00 0.00 0.03 0.05
150
0.90 0.90 0.00 0.00 0.02 0.03 0.28 0.28 0.00 0.00 0.03 0.06
1.00 1.00 0.00 0.01 0.02 0.03 0.33 0.33 0.00 0.00 0.04 0.06
1.10 1.10 0.00 0.00 0.02 0.03 0.38 0.38 0.00 0.00 0.04 0.06
1.20 1.20 0.00 0.00 0.02 0.03 0.42 0.42 0.00 0.00 0.04 0.07
1.30 1.30 0.00 0.00 0.02 0.03 0.46 0.46 0.00 0.00 0.04 0.07
Table 4.17: Establishing bias and error bars of β̂ calculated by all data and effect on λ̂+,− estimated by applying the non-parametric approach
according to Sornette & Malevergne to 1000 synthetic samples consisting of N = 2507 data points. The bias is calculated by comparing mean
+,−
values β̂ all data and λ̂ (β̂all data ) to original values denoted by βorig and corresponding tail dependence estimator λ̂+,− (βorig ) and for the estimation
of error bars standard deviation ’std’ and 95% quantiles of the estimates are provided. Relative bias (’rel.bias’) is calculated as percentage of
+,−
λ̂ (βorig ). Tail indexes α were set equal to three to avoid a second source of error and ’inf’ means ·/0.
+,− +,−
βorig β̂SI 2 bias rel. bias std 95% quantile λ̂ (βorig ) λ̂ (β̂SI 2 ) bias rel. bias std 95% quantile
α=3
0.05 0.05 0.00 0.00 0.11 0.17 0.00 0.28 0.28 * 0.45 0.71
0.10 0.10 0.00 0.00 0.11 0.15 0.00 0.12 0.12 * 0.32 0.87
0.20 0.20 0.00 0.00 0.10 0.16 0.01 0.04 0.03 * 0.17 0.02
0.30 0.30 0.00 0.00 0.10 0.16 0.02 0.04 0.02 0.62 0.08 0.05
0.40 0.40 0.00 0.00 0.10 0.16 0.05 0.06 0.01 0.20 0.06 0.07
0.50 0.50 0.00 0.00 0.10 0.16 0.08 0.09 0.01 0.13 0.06 0.10
0.60 0.06 0.00 0.00 0.11 0.17 0.13 0.14 0.01 0.08 0.08 0.12
0.70 0.70 0.00 0.00 0.11 0.16 0.18 0.19 0.01 0.06 0.08 0.14
0.80 0.80 0.00 0.00 0.11 0.17 0.23 0.23 0.00 0.00 0.10 0.17
151
0.90 0.90 0.00 0.00 0.11 0.17 0.28 0.28 0.00 0.00 0.10 0.17
1.00 1.00 0.00 0.00 0.11 0.16 0.33 0.33 0.00 0.00 0.11 0.19
1.10 1.10 0.00 0.00 0.10 0.16 0.38 0.39 0.01 0.03 0.11 0.19
1.20 1.20 0.00 0.00 0.10 0.16 0.42 0.43 0.01 0.02 0.12 0.19
1.30 1.30 0.00 0.00 0.10 0.17 0.46 0.47 0.01 0.02 0.11 0.20

Table 4.18: Establishing bias and error bars of β̂SI 2 calculated by second β-smile condition: Y ≥ Y (k) and effect on λ̂+,− estimated by applying
the non-parametric approach according to Sornette & Malevergne to 1000 synthetic samples consisting of N = 2507 data points. The bias is
+,−
calculated by comparing mean values β̂ all data and λ̂ (β̂all data ) to original values denoted by βorig and corresponding tail dependence estimator
λ̂+,− (βorig ) and for the estimation of error bars standard deviation ’std’ and 95% quantiles of the estimates are provided. Tail indexes α were set
+,−
equal to three to avoid a second source of error and ∗ means that relative bias (’rel.bias’) calculated as percentage of λ̂ (βorig ) ≥ 100%.
α ν̂ bias rel. bias std 95% quantile b̂γn bias rel. bias std 95% quantile
1.50 1.53 0.03 0.02 0.16 0.27 1.50 0.00 0.00 0.21 0.35
2.00 2.05 0.05 0.03 0.21 0.34 2.02 0.02 0.01 0.29 0.51
2.50 2.56 0.06 0.02 0.26 0.44 2.53 0.03 0.01 0.36 0.65
3.00 3.07 0.07 0.02 0.31 0.52 2.99 0.01 0.03 0.41 0.76
3.50 3.57 0.07 0.02 0.38 0.62 3.50 0.00 0.00 0.49 0.81
152
4.00 4.07 0.07 0.02 0.46 0.79 3.98 0.02 0.01 0.59 1.05
4.50 4.59 0.09 0.02 0.45 0.80 4.50 0.00 0.00 0.60 1.00
5.00 5.12 0.12 0.02 0.53 0.95 5.04 0.04 0.01 0.73 1.29
Table 4.19: Establishing bias and error bars of ν̂ and b̂γn , estimated for 1000 synthetic samples consisting of N = 2507 data points. The bias is
γ
calculated by comparing mean values ν̂ and b̂n to original values denoted by α and for the estimation of error bars standard deviation ’std’ and
95% quantiles of the estimates are provided. Relative bias (’rel.bias’) is calculated as percentage of α.
+,− +,− +,−
βorig λ̂ (α, βorig ) λ̂ (ν̂, β̂all data ) bias rel. bias std 95% quantile λ̂ (ν̂, β̂SI 2 ) bias rel. bias std 95% quantile
α=3
0.05 0.00 0.01 0.01 * 0.08 0.01 0.27 0.27 * 0.44 0.73
0.10 0.00 0.00 0.00 0.30 0.00 0.00 0.12 0.12 * 0.32 0.88
0.20 0.01 0.01 0.00 0.05 0.01 0.01 0.05 0.04 * 0.18 0.03
0.30 0.02 0.02 0.00 0.01 0.01 0.02 0.03 0.01 0.39 0.05 0.05
0.40 0.05 0.05 0.00 0.01 0.02 0.04 0.06 0.01 0.21 0.05 0.08
0.50 0.09 0.08 0.00 0.00 0.03 0.06 0.09 0.01 0.11 0.07 0.11
0.60 0.13 0.12 0.00 0.02 0.04 0.07 0.14 0.01 0.08 0.07 0.14
0.70 0.18 0.17 0.00 0.01 0.04 0.07 0.19 0.01 0.06 0.09 0.16
0.80 0.23 0.23 0.00 0.00 0.05 0.08 0.24 0.01 0.06 0.10 0.16
153
0.90 0.28 0.27 0.00 0.00 0.06 0.10 0.28 0.01 0.02 0.11 0.19
1.00 0.33 0.32 0.01 0.02 0.06 0.10 0.33 0.01 0.02 0.12 0.20
1.10 0.38 0.37 0.00 0.00 0.06 0.10 0.38 0.00 0.01 0.12 0.18
1.20 0.42 0.42 0.01 0.01 0.06 0.11 0.42 0.00 0.00 0.12 0.20
1.30 0.46 0.46 0.01 0.01 0.06 0.10 0.47 0.01 0.01 0.13 0.21
Table 4.20: Establishing

bias and error bars of λ̂+,− (ν̂, β̂all data ) with β̂ calculated by all data and λ̂+,− (ν̂, β̂SI 2 ) with β̂ calculated by second
β-smile condition: Y ≥ Y (k) by applying the non-parametric approach according to Sornette & Malevergne to 1000 synthetic samples consisting
+,− +,−
of N = 2507 data points. The bias is calculated by comparing mean values λ̂ (ν̂, β̂all data ) and λ̂ (ν̂, β̂SI 2 ) to original values denoted by
+,−
λ̂ (α, βorig ) and for the estimation of error bars standard deviation ’std’ and 95% quantiles of the estimates are provided. ∗ means that relative
+,−
bias (’rel.bias’) calculated as percentage of λ̂ (βorig ) ≥ 100%.
We also find a bias of Hill’s estimator denoted by ν̂ reported in table (4.19). Com-
pared to Gabaix’s estimator denoted by b̂γn the bias of the Hill estimator is significantly
bigger but b̂γn instead has a wider error bar.
+,− +,−
In table (4.20) results of λ̂ (ν̂, β̂all data ) and λ̂ (ν̂, β̂SI 2 ) estimated as mean values
of 1000 synthetic samples with identical inputs are shown. We notice that the bias of the
tail dependence estimators does not significantly change when we calculate the tail index
by the Hill estimator compared to results reported in tables (4.17) and (4.18), where we
used correct α. Error bars instead become larger because as shown in (4.19) tail index
estimators add another source of uncertainty to tail dependence estimators. Anyway
the calculation of Hill’s estimator is faster and more simple compared to Gabaix’s
estimator and as tail dependence estimators are not sensitive to moderate changes of
tail index α but are very sensitive to changes in β, Hill’s estimator might be accurate
enough here because on synthetic time series bias resulting from the Hill estimator has
negligible effect on the tail dependence coefficient estimates.
We conclude that, applied to our synthetic time series, which are generally built of
Gaussian distributions with tails modeled by heavy tailed distribution parts, concepts
according to Sornette & Malevergne with β̂ calculated by all data allow to estimate
λ+,− in a accurate way showing us the best solution that we can expect. Furthermore
we found that the second β-smile condition performs well for βorig ≥ 0.5 with respect
to relative bias as well as error bars.
Now, for comparison, I implemented concepts according to Poon, Rockinger, and
Tawn and concepts according to Schmidt & Stadtmüller to synthetic samples. For
these concepts there is no need to calculate any linear factor, but for example we
can compare the results to the tail dependence estimators according to Sornette &
Malevergne applying their non-parametric approach and compare the resulting error
bars to error bars estimated by bootstrap sampling with replacement. Table (4.21)
shows tail dependence coefficients estimated by the different concepts including error
bars calculated for 1000 synthetic samples compared to their average values. Tail
indexes were calculated by Hill’s estimator. For comparison I added βorig and λ̂+,− (βorig )
with tail indexes also calculated by Hill’s estimator. Respective standard deviations
and 95% quantiles, also given in table (4.21), show us that error bars resulting from
both factors, ν̂ and β̂ are around double size of errors bars just resulting from β̂ given
in table (4.17) and of same extent as error bars estimated by bootstrap sampling with
replacement in subsection (3.2.3). For the methods according to Schmidt & Stadtmüller
a relation for the calculation of the estimates’ variance σL2 (θ) was proposed in their
paper [24] (2005) that was already discussed in subsection (3.4.3). Applied to real
historical data of index S&P 500 and corresponding assets the error bar estimates given
by relation (3.92) were high compared to bootstrap quantiles. Compared to the error
bars calculated for the 1000 synthetic samples the proposed estimator works better.
σL (θ) are close to standard deviations ’std’ calculated for the 1000 samples compared
to their average values. Another standard deviation estimator σ̂, which was introduced
in the paper [13] (2004) to provide error bar estimates for χ̂+,− seems significantly lower
than bootstrap estimates of real historical data provided in subsection (3.1.2) as well as
standard deviations calculated for the 1000 samples compared to their average values
for synthetic samples provided in table (4.21). Looking at total values of the estimates,
the different estimators still yield mostly different results. In terms of error bars the
three presented methods all yield reasonable results that seem to be approximately
Gaussian distributed and agree well with results presented in chapter (3).
154
EV T
βorig λ̂+,− (ν̂, βall data ) std 95% quantile λ̂·,m std 95% quantile λ̂·,m std 95% quantile χ̂ σ̂ std 95% quantile
0.05 0.01 0.08 0.01 0.05 0.02 0.04 0.05 0.02 0.04 0.87 0.09 0.13 0.06
0.1 0.00 0.00 0.00 0.06 0.02 0.04 0.06 0.02 0.04 0.87 0.09 0.14 0.07
0.2 0.01 0.01 0.01 0.10 0.03 0.05 0.10 0.03 0.05 0.87 0.09 0.14 0.07
0.3 0.02 0.01 0.02 0.15 0.03 0.05 0.15 0.03 0.05 0.87 0.08 0.14 0.06
0.4 0.05 0.02 0.04 0.19 0.04 0.06 0.19 0.06 0.05 0.87 0.09 0.14 0.07
0.5 0.08 0.03 0.06 0.24 0.04 0.06 0.25 0.04 0.06 0.88 0.09 0.15 0.07
0.6 0.12 0.04 0.07 0.28 0.04 0.06 0.28 0.04 0.06 0.88 0.09 0.14 0.06
0.7 0.17 0.04 0.07 0.32 0.04 0.07 0.32 0.04 0.07 0.88 0.09 0.13 0.06
155
0.8 0.23 0.05 0.08 0.36 0.04 0.07 0.36 0.04 0.07 0.89 0.09 0.12 0.06
0.9 0.27 0.06 0.10 0.40 0.04 0.07 0.40 0.04 0.07 0.89 0.09 0.13 0.06
1 0.32 0.06 0.10 0.43 0.04 0.07 0.43 0.04 0.07 0.89 0.09 0.12 0.05
1.1 0.37 0.06 0.10 0.46 0.04 0.07 0.46 0.04 0.07 0.89 0.09 0.12 0.05
1.2 0.42 0.06 0.11 0.49 0.04 0.07 0.49 0.04 0.07 0.89 0.09 0.12 0.05
1.3 0.46 0.06 0.10 0.51 0.04 0.07 0.52 0.04 0.07 0.89 0.09 0.12 0.05
EV T +,−
Table 4.21: Comparison of estimates by non-parametric estimators λ̂·,m , λ̂·,m according to Schmidt & Stadtmüller, and χ̂ according to Poon,
Rockinger, and Tawn with λ̂+,− (βall data ) according to Sornette & Malevergne by applying the different concepts to 1000 synthetic samples consisting
of N = 2507 data points created by different βorig . For the estimation of error bars standard deviation ’std’ and 95% quantiles of the estimates
+,−
are calculated and for χ̂ the proposed standard deviation σ̂ is given for comparison. Tail indexes α were estimated by the Hill estimator.
Chapter 5
Concluding Remarks
Now we summarize the findings of chapter (4) and finally draw some conclusions for
practical use of the different concepts.
In section (4.1) we have seen that all tail dependence coefficients λ̂+,− estimated by
the non-parametric approach and by the parametric approach according to Sornette
& Malevergne for assets and indexes traded outside the U.S. were vanishing while all
estimates of the crucial parameter β̂ were comparably small. This seems implausible.
Furthermore we found on U.S. assets and indexes that for β̂ < 0.2 tail dependence
coefficient estimates λ̂ → 0. However, for index AORD (ASX) and included assets
results estimated by concepts according to Schmidt & Stadtmüller reported in table
(4.11) look reasonable. To achieve diversification of extreme financial risks within a
portfolio we are looking for small or vanishing tail dependence coefficients, which we
expect to be rare.
In contrast, as shown in section (4.2), applied to exchange rates of various foreign
currencies with the US$ results by the methods according to Sornette & Malevergne
were more reasonable. Concepts according to Sornette & Malevergne yielded mostly
vanishing results while results by concepts according to Schmidt & Stadtmüller were
all close together and around 0.9. Approaches according to Poon, Rockinger, and Tawn
again yielded nearly identical results for all cases.
In section (4.3) we found that the non-parametric approach according to Sornette
& Malevergne with β̂ estimated for all data applied to synthetic time series succeeded
in providing estimates that were unbiased and of satisfying accuracy. This at least
provides us with lower error bounds (the optimum solution we can expect) and is a
promising result for application of the concepts to real data. Estimation of tail index
α by Hill’s estimator has shown a small bias on our synthetic sample surveys reported
in table (4.19). But the impact on the final estimators, as shown in table (4.20), was
marginal. Furthermore, for real data we can apply the Gabaix estimator to calculate
tail index α̂ for comparison because in spite of wider error bars the Gabaix estimator
should perform better than Hill’s estimator with respect to bias facing heteroscedastic
time series.
Anyway, at the example of synthetic time series we were assuming that assets and in-
dex have a common factor that is constant over the whole distribution interval, whereas
by the β-smile improvement conditions we are generally assuming that dependence in
the extreme parts of the distributions might be different compared to dependence in
the body of the distributions. As we were able to calculate the common factors β only
by tail data applying the second β-smile condition reported in table (4.18), we should
always check on real data whether βall data is close to βSI· to get a feeling about de-
pendences between assets and index. Applying the β-smile improvement conditions to
156
synthetic time series we detected a strong bias in the first and in the third SI conditions.
The second SI condition has shown to perform well for (β > 0.5) with respect to bias.
Tables (4.6), (4.8), and (4.10) show β̂-values calculated for all data on historical time
series that are much bigger than all of our synthetic sample estimates β̂ reported in
table (4.17), which all fulfill β̂ < 0.5. This might indicate that the bias of historic time
series could be different from the bias of synthetic time series. Now we come to the final
comparison of the different concepts on synthetic time series: in table (4.21) we see
all the different concepts including error bar estimates applied to synthetic time series.
Estimates by the different methods are mostly inconsistent as it was also the case for
historic time series. Whereas χ̂ is always big and within a narrow range, the two other
estimators λ̂+,− and λ̂·,m are on a wider range but still different from each other. What
all methods have in common is that they are increasing in increasing β, whereas λ̂·,m
tends to be slightly higher than λ̂+,− primarily for small β̂. This is consistent with
real data results i.e. reported in section (4.1) where the different concepts were applied
to major financial centers in the world. Comparing estimates of λ+,− to estimates of
λ·,m on the historical reference data series of the index S&P 500 and the nine assets
provided in tables (3.8) and (3.10) for the Sornette & Malevergne estimators and in
tables (3.24) and (3.25) for the Schmidt & Stadtmüller estimators we detected that
within different ranges the relative proportions agree in many cases. Asset Texas In-
struments Inc. (TXN) is the smallest observation in positive and negative tails observed
by both methods and sample sizes and Hewlett-Packard Co. (HPQ) and Coca-Cola Co.
(KO) both belong to the biggest observations in the positive and negative tails also for
both reference data sets. There are many of these conformities showing us that the
two estimators qualitatively point into the same direction. As it is our purpose to find
differences between the tail dependences of the different assets and the index for small
β̂, we should always calculate λ·,m according to Schmidt & Stadtmüller for comparison
because λ+,− according to Sornette & Malevergne mostly yield zero tail dependence in
that case.
It cannot be concluded that one of the presented concepts for the estimation of
tail dependence outperforms the others by all criteria. Anyway, having the methods
on our hands that were discussed within this report, I would recommend to apply
all of the available concepts for the estimation of the tail dependence coefficient to
various data representing alternative choices out of the field of interest and then draw
conclusions considering the differences between the estimates of alternative portfolio
choices. Having a pool of alternatives evaluated by the different concepts might allow
the investor to pick out the method that fits best to his respective purpose and helps
him to get an intuition about dependences between assets and indexes over the whole
range of the distribution. Finally it might enable him to choose between the considered
alternatives.
The coefficient of tail dependence provides the investor with a tool to minimize
extreme correlations within his portfolio, which first of all should help him to endure
bearish markets by optimized diversification criteria. Globalization might have lead
to increasing extreme dependences across and within economies making extreme left-
tail events more and more likely to happen. To be responsive to this movements the
coefficient of tail dependence represents a simple and concrete extension to financial
risk management.
157
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159
Appendix
M-Files
In the first part of the appendix Matlab m-files are provided. Comments are parenthe-
sized in: %. . . %, which is also read as a comment by the Matlab solver. Implementation
works by copy and paste, whereas data sets should be provided in Excel format (xls or
xlsx).
Import of Data
clear all;
exl = actxserver(’excel.application’);
exlWkbk = exl.Workbooks;
exlFile = exlWkbk.Open([’%set path for opening%’]);
nn=%number of rows%;
n=%number of columns%;
exlSheet=exlFile.Sheets.Item(’table1’); %choice of table%;
dat_range = [’B3:e’ num2str(nn)]; %range in Excel file%;

rngObj=exlSheet.Range(dat_range);
exlData=rngObj.Value; %end of read-in%;
Prices(:,:)=exlData;
Prices=cell2mat(Prices); %define Prices as matrix%;
for j=1:n;
%for i=nn-2:-1:1;
for i=nn-3:-1:1;
Returns(i,j)=log(Prices(i,j))-log(Prices(i+1,j));
end
end %transform daily prices to returns%
a=1;
b=nn-3; %data range%
Data can also be imported by:

Prices=xlsread(’testdata.xls’, 1, ’A4:B5’) %1 denotes table1%
But then the Excel-data sheet has to be copied into the folder where the m-file is safed.
160
Approach according to Poon, Rockinger, and Tawn
retdesc=sort(Returns(a:b,1:n),’descend’);
retasc=sort(Returns(a:b,1:n)); %sort Returns%
Z=roundn((b-a)*0.04,0); %define ’k’%
ZZ=roundn(0.005*(b-a),0); %define ’c’%
%calculate tail indexes by the Hill estimator%;
for j=1:n;
vk(j)=(1/(Z)*sum(log(retdesc(1:Z,j)))-log(retdesc(Z,j)))^-1;
vka(j)=(1/(Z)*sum(log(-retasc(1:Z,j)))-log(-retasc(Z,j)))^-1;
end
%calculate l%
t=linspace(1,Z,Z);
p=size(t);
p=p(2);
for j=1:n;
for i=1:p;
f=t(i);
d=@(f)(f/(b-a)*(retdesc(f,j))^vk(j));
dd=@(f)(f/(b-a)*(-retasc(f,j))^vka(j));
lpos(i,j)=d(f);
lneg(i,j)=dd(f);
end
end
lmk_pos=mean(lpos(1:Z,:));
lmy_pos=mean(lpos(ZZ:Z,:));
lmk_neg=mean(lneg(1:Z,:));
lmy_neg=mean(lneg(ZZ:Z,:));
%calculate S and T%
for j=1:n-1;
for i=1:Z;
S(i,1)=-1/log(1-lmk_pos(1)*retdesc(i,1)^(-vk(1)));
T(i,j)=-1/log(1-lmk_pos(j+1)*retdesc(i,j+1)^(-vk(j+1)));
S_y(i,1)=-1/log(1-lmy_pos(1)*retdesc(i,1)^(-vk(1)));
T_y(i,j)=-1/log(1-lmy_pos(j+1)*retdesc(i,j+1)^(-vk(j+1)));
Sn(i,1)=-1/log(1-lmk_neg(1)*(-retasc(i,1))^(-vka(1)));
Tn(i,j)=-1/log(1-lmk_neg(j+1)*(-retasc(i,j+1))^(-vka(j+1)));
Sn_y(i,1)=-1/log(1-lmy_neg(1)*(-retasc(i,1))^(-vka(1)));
Tn_y(i,j)=-1/log(1-lmy_neg(j+1)*(-retasc(i,j+1))^(-vka(j+1)));
end
end
%calculate Z%
for j=1:n-1;
for i=1:Z;
z(i,j)=min(S(i,1),T(i,j));
z_y(i,j)=min(S_y(i,1),T_y(i,j));
zn(i,j)=min(Sn(i,1),Tn(i,j));
zn_y(i,j)=min(Sn_y(i,1),Tn_y(i,j));
end
end
161
%estimate overline_chi and corresponding sigma%
for j=1:n-1;
ovchi(j)=2/Z*(sum(log(z(:,j)./z(Z,j))))-1;
sigovchi(j)=(ovchi(j)+1)/sqrt(Z);
ovchi_y(j)=2/Z*(sum(log(z_y(:,j)./z_y(Z,j))))-1;
sigovchi_y(j)=(ovchi_y(j)+1)/sqrt(Z);
ovchin(j)=2/Z*(sum(log(zn(:,j)./zn(Z,j))))-1;
sigovchin(j)=(ovchin(j)+1)/sqrt(Z);
ovchin_y(j)=2/Z*(sum(log(zn_y(:,j)./zn_y(Z,j))))-1;
sigovchin_y(j)=(ovchin_y(j)+1)/sqrt(Z);
end
%output%
ovchi
sigovchi
%estimate chi and corresponding sigma if overline_chi=1%
for j=1:n-1;
if abs(ovchi(j)-1)<=sigovchi(j);
chi(j)=z(Z,j)*Z/(b-a+1);
sigchi(j)=sqrt(z(Z,j)^2*Z*(b-a+1-Z)/(b-a+1)^3);
else
chi(j)=0;
sigchi(j)=0;
end
if abs(ovchi_y(j)-1)<=sigovchi_y(j);
chi_y(j)=z_y(Z,j)*Z/(b-a+1);
sigchi_y(j)=sqrt(z_y(Z,j)^2*Z*(b-a+1-Z)/(b-a+1)^3);
else
chi_y(j)=0;
sigchi_y(j)=0;
end
if abs(ovchin(j)-1)<=sigovchin(j);
chin(j)=zn(Z,j)*Z/(b-a+1);
sigchin(j)=sqrt(zn(Z,j)^2*Z*(b-a+1-Z)/(b-a+1)^3);
else
chin(j)=0;
sigchin(j)=0;
end
if abs(ovchin_y(j)-1)<=sigovchin_y(j);
chin_y(j)=zn_y(Z,j)*Z/(b-a+1);
sigchin_y(j)=sqrt(zn_y(Z,j)^2*Z*(b-a+1-Z)/(b-a+1)^3);
else
chin_y(j)=0;
sigchin_y(j)=0;
end
end
%output%
chi
chi_y
chin
chin_y
162
Non-Parametric Approach according to Sornette & Malevergne
Y=roundn(0.005*(b-a),0); %define ’c’%
kretdesc=retdesc(1:Z,:); %from 1 to ’k’;
yretdesc=retdesc(Y:Z,:); %from ’c’ to ’k’;
kretasc=retasc(1:Z,:);
yretasc=retasc(Y:Z,:);
%calculate beta for the whole data set%
for q=1:n-1;
coeff=polyfit(Returns(a:b,1),Returns(a:b,q+1),1);
bbeta(q)=coeff(1);
end
%estimate tail indexes by the Hill estimator%
vk=(1/(Z)*sum(log(kretdesc(:,1)))-log(kretdesc(Z,1)))^-1;
vka=(1/(Z)*sum(log(-kretasc(:,1)))-log(-kretasc(Z,1)))^-1;
%estimate ’l’ and lambda%
for i=1:n-1;
ly(i)=mean(yretdesc(:,i+1)./(yretdesc(:,1)));
lk(i)=mean(kretdesc(:,i+1)./(kretdesc(:,1)));
lya(i)=mean(yretasc(:,i+1)./(yretasc(:,1)));
lka(i)=mean(kretasc(:,i+1)./(kretasc(:,1)));
if(bbeta(i)>0)
L_nonpar_y_up(i)=1/(max(1,ly(i)/bbeta(i)))^vk;
L_nonpar_k_up(i)=1/(max(1,lk(i)/bbeta(i)))^vk;
L_nonpar_y_lo(i)=1/(max(1,lya(i)/bbeta(i)))^vka;
L_nonpar_k_lo(i)=1/(max(1,lka(i)/bbeta(i)))^vka;
elseif(bbeta(i)<=0)
L_nonpar_y_up(i)=0;
L_nonpar_k_up(i)=0;
L_nonpar_y_lo(i)=0;
L_nonpar_k_lo(i)=0;
end
end
%output%
L_nonpar_k_up
L_nonpar_k_lo
L_nonpar_y_up
L_nonpar_y_lo
163
Parametric Approach according to Sornette & Malevergne
ZZ=roundn(0.005*(b-a),0); %define ’c’%
%estimate tail indexes by the Hill estimator%
vk=(1/(Z)*sum(log(retdesc(1:Z,1)))-log(retdesc(Z,1)))^-1
vka=(1/(Z)*sum(log(-retasc(1:Z,1)))-log(-retasc(Z,1)))^-1
%calculate beta for the whole data set%
for q=1:n-1;
coeff=polyfit(Returns(a:b,1),Returns(a:b,q+1),1);
bbeta(q)=coeff(1);
end
%calculate error epsilon%
for i=1:n-1;
eps=Returns(:,i+1)-(bbeta(1,i)*Returns(:,1));
Eps(:,i)=eps;
end
%estimate Cy and mean value of Cy for most extr. 4 per cent%
t=linspace(1,Z,Z);
p=size(t);
p=p(2);
for i=1:p;
f=t(i);
d=@(f)(f/(b-a)*(retdesc(f,1))^vk);
dd=@(f)(f/(b-a)*(-(retasc(f,1)))^vka);
cypos(i,1)=d(f);
cyneg(i,1)=dd(f);
end;
cymk_pos=mean(cypos(1:Z));
cymy_pos=mean(cypos(ZZ:Z));
cymk_neg=mean(cyneg(1:Z));
cymy_neg=mean(cyneg(ZZ:Z));
%estimate Ceps and mean value of Ceps for most extr. 4 per cent%
epsdesc=sort(Eps(a:b,:),’descend’);
epsasc=sort(Eps(a:b,:));
for i=1:n-1;
for j=1:p;
f=t(j);
d=@(f)(f/(b-a)*(epsdesc(f,i))^vk);
dd=@(f)(f/(b-a)*(-(epsasc(f,i)))^vka);
cepos(j,i)=d(f);
ceneg(j,i)=dd(f);
end
end
cemk_pos=mean(cepos(1:Z,:));
cemy_pos=mean(cepos(ZZ:Z,:));
cemk_neg=mean(ceneg(1:Z,:));
cemy_neg=mean(ceneg(ZZ:Z,:));
164
%estimate lambda%
for j=1:n-1;
if(bbeta(j)>0)
L_par_k_up(1,j)=(1+(bbeta(1,j)^-vk)*cemk_pos(1,j)/cymk_pos)^-1;
L_par_y_up(1,j)=(1+(bbeta(1,j)^-vk)*cemy_pos(1,j)/cymy_pos)^-1;
L_par_k_lo(1,j)=(1+(bbeta(1,j)^-vka)*cemk_neg(1,j)/cymk_neg)^-1;
L_par_y_lo(1,j)=(1+(bbeta(1,j)^-vka)*cemy_neg(1,j)/cymy_neg)^-1;
elseif(bbeta(j)<=0)
L_par_k_up(1,j)=0;
L_par_y_up(1,j)=0;
L_par_k_lo(1,j)=0;
L_par_y_lo(1,j)=0;
end
end
%output%
L_par_k_up
L_par_k_lo
L_par_y_up
L_par_y_lo
165
β-Smile Improvement Conditions
A=Returns(a:b,1:n);
retdesc=sort(A,’descend’);
retasc=sort(A); %sort Returns%
Z=roundn((b-a+1)*0.04,0); %define ’k’%
Y=roundn(0.005*(b-a+1),0); %define ’c’%
%Implementation of chosen condition and calculation of beta_SI%
for u=1:n-1;
h=1;
ha=1;
for i=1:b-a+1;
if (A(i,1)>=retdesc(Z,1))&&(A(i,u+1)>=retdesc(Z,u+1));
%if (A(i,1)>=retdesc(Z,1));
%if (A(i,u+1)>=retdesc(Z,u+1));
D(h,1)=A(i,1);
D(h,2)=A(i,u+1);
h=h+1;
end
if (A(i,1)<=retasc(Z,1))&&(A(i,u+1)<=retasc(Z,u+1));
%if (A(i,1)<=retasc(Z,1));
%if (A(i,u+1)<=retasc(Z,u+1));
Da(ha,1)=A(i,1);
Da(ha,2)=A(i,u+1);
ha=ha+1;
end
end
if (size(D)==[0,0]);
elseif (size(D)==[1,2]);
coeff=NaN
u
else
coeff=polyfit(D(:,1),D(:,2),1);
end
if (size(Da)==[0,0]);
elseif (size(Da)==[1,2]);
coeffa=NaN;
u
else
coeffa=polyfit(Da(:,1),Da(:,2),1);
end
bbeta(1,u)=coeff(1);
bbetaa(1,u)=coeffa(1);
%output%
bbeta %positive tail%
bbetaa %negative tail%
166
Approaches according to Schmidt & Stadtmüller
A=Returns(a:b,1:n);
p=size(A);
B=sort(A);
C=zeros(p(1,1),p(1,2));
for k=1:p(1,2); along columns%
pp=1;
for i=1:p(1,1); %along rows%
v=find(A(:,k)==B(i,k));
t=size(v);
t=t(1,1);
if t>1;
for z=1:t;
C(v(z),k)=0.5-t/2+i;
end
else C(v,k)=i;
v=[];
end
end
end
k=0.04*(b-a+1);
sum_L(1,1:n-1)=0;
sum_U(1,1:n-1)=0;
sum_L_EVT(1,1:n-1)=0;
sum_U_EVT(1,1:n-1)=0;%set sums to zero%
%conditions for the different sums%
for j=1:n-1;
for i=1:b-a+1;
if(C(i,1)<=k) && (C(i,j+1)<=k);

sum_L(1,j)=sum_L(1,j)+1;
end
if(C(i,1)>(b-a+1)-k) && (C(i,j+1)>(b-a+1)-k);
sum_U(1,j)=sum_U(1,j)+1;
end
if(C(i,1)>(b-a+1)-k) || (C(i,j+1)>(b-a+1)-k);
sum_U_EVT(1,j)=sum_U_EVT(1,j)+1;
end
if(C(i,1)<=k) || (C(i,j+1)<=k);
sum_L_EVT(1,j)=sum_L_EVT(1,j)+1;
end
end
end
%estimate and give out lambda%
lamb_L(1,:)=sum_L(1,:)./k
lamb_L_EVT(1,:)=2-sum_L_EVT(1,:)./k
lamb_U(1,:)=sum_U(1,:)./k
lamb_U_EVT(1,:)=2-sum_U_EVT(1,:)./k
167
Tail Indexes by the Gabaix Estimator
A=Returns(a:b,1:n);
AA=sort(A,’descend’);
B=sort(-A,’descend’); %sort Returns%
p=size(A);
C=NaN(p(1,1),p(1,2));
c=NaN(p(1,1),p(1,2));
for k=1:p(1,2); %along columns%
for i=1:p(1,1); %along rows%
v=find(-A(:,k)==B(i,k));%negative tail%
vv=find(A(:,k)==AA(i,k));%positive tail%
t=size(v);
t=t(1,1);
tt=size(vv);
tt=tt(1,1);
if t>1;
for z=1:t;
C(v(z),k)=0.5-t/2+i;%negative tail%
end
else C(v,k)=i;
end
if tt>1;
for z=1:tt;
c(vv(z),k)=0.5-tt/2+i;%positive tail%
end
else c(vv,k)=i;
end
end
end
Z=round(0.04*(b-a+1)); %define ’k’%
Y=round(0.005*(b-a)); %define ’c’%
AAA=log(AA(1:Z,:));
BB=log(B(1:Z,:));
CC=log(sort(C)-0.5);
cc=log(sort(c)-0.5);
for i=1:n;
p=polyfit(AAA(:,i),cc(1:Z,i),1);%positive tail
pp=polyfit(BB(:,i),CC(1:Z,i),1);%negative tail
bnn(i)=-(pp(1,1));
bn(i)=-(p(1,1));
end
%output%
bn %upper tail indexes%
bnn %lower tail indexes%
168
Composition of Synthetic Data Set
clear all
for jj=1:1000;
p=2507; %sample size%

vvvv=3; %tail index%
bbeta=0.9; %predefined beta%
u1=rand(p,1);
u2=rand(p,1);
Z=round(0.04*p);
u1desc=sort(u1,’descend’);
u2desc=sort(u2,’descend’);
%Box-Muller trafo;
z1(:,1)=sqrt(2) *erfinv (2*u1desc - 1);
z2(:,1)=sqrt(2) *erfinv (2*u2desc - 1);
%here we have the standard normal distributed part for eps and x%
u1desc_up(:,1)=rand(Z,1);
u2desc_up(:,1)=rand(Z,1);
u1desc_lo(:,1)=rand(Z,1);
u2desc_lo(:,1)=rand(Z,1);
for i=1:Z;
z1_up(i,1)=(1/(1-u1desc_up(i,1)))^(1/vvvv);
z2_up(i,1)=(1/(1-u2desc_up(i,1)))^(1/vvvv);
z1_lo(i,1)=-((1/(1-u1desc_lo(i,1)))^(1/vvvv));
z2_lo(i,1)=-((1/(1-u2desc_lo(i,1)))^(1/vvvv));
end
%heavy tail parts are created%
%set the different distribution parts together into a single total%
%distribution%
z1_up=sort(z1_up,’descend’);
z2_up=sort(z2_up,’descend’);
z1_lo=sort(z1_lo,’descend’);
z2_lo=sort(z2_lo,’descend’);
z1_up=z1(101,1)/z1_up(Z,1)*z1_up;
z2_up=z2(101,1)/z2_up(Z,1)*z2_up;
z1_lo=z1(p-Z)/z1_lo(1,1)*z1_lo;
z2_lo=z2(p-Z)/z2_lo(1,1)*z2_lo;
z1(1:Z,1)=z1_up;
z2(1:Z,1)=z2_up;
z1(p-Z+1:p,1)=z1_lo;
z2(p-Z+1:p,1)=z2_lo;
y=z1;
eps=z2;
169
%define mu and sigma if requested%
y_s=(0.05*10^(-3)+y(:).*0.02)*0.5;
eps_s=(0.05*10^(-3)+eps(:).*0.02)*0.5;
%now we have to build the y values by x, eps, and beta%

%The problem now is that both x_s and eps_s are in descending order, which%
%means that high return-values correspond to high eps-values. This is a%
%violation of i.i.d. Therefore we bring back the random sequence to our%
%samples by uniform sampling w.o. replacement%
o1=randperm(p)’;
o2=randperm(p)’;
for i=1:p
ys(i,1)=y_s(o1(i),1);
epss(i,1)=eps_s(o2(i),1);
x_s(i,1)=ys(i,1)*bbeta+epss(i,1);
end
xdesc=sort(x_s,’descend’);
epsdesc=sort(epss,’descend’);
ydesc=sort(ys,’descend’);
xasc=sort(x_s);
epsasc=sort(epss);
yasc=sort(ys);
170
Descriptive Statistics
The kurtosis is a measure of the extent to which data is concentrated in the peak versus
the tail. A positive value (leptokurtic) indicates that data is concentrated in the peak;
a negative value (platykurtic) indicates that data is concentrated in the tail. For all
assets and indexes we observe a kurtosis greater than zero, which is inconsistent with the
assumption of Gaussian distributed returns. The negative skewness for all assets means
that there is an elongated tail on the left of the probability density distribution function
meaning that we find more data in the left tail compared to Gaussian distributed
returns.
N Mean Std Skew. Kurt.

Statistics Statistics Statistics Statistics Std. error Statistik Std. error
ret SP500 2506 2.43E-04 4.05E-03 -3.21E-01 4.90E-02 5.42E+00 9.80E-02
ret BMY 2506 1.40E-05 1.20E-02 -1.41E+01 4.90E-02 3.61E+02 9.80E-02
ret CVX 2506 2.30E-05 8.73E-03 -1.60E+01 4.90E-02 5.46E+02 9.80E-02
ret HPQ 2506 1.00E-05 1.38E-02 -9.81E+00 4.90E-02 1.96E+02 9.80E-02
ret KO 2506 5.10E-05 1.06E-02 -1.61E+01 4.90E-02 4.40E+02 9.80E-02
ret MMM 2506 2.70E-05 8.65E-03 -1.54E+01 4.90E-02 5.18E+02 9.80E-02
ret PG 2506 -2.40E-05 1.17E-02 -1.49E+01 4.90E-02 3.62E+02 9.80E-02
ret SGP 2506 4.60E-05 1.38E-02 -1.28E+01 4.90E-02 2.83E+02 9.80E-02
ret TXN 2506 3.00E-05 1.81E-02 -7.49E+00 4.90E-02 1.26E+02 9.80E-02
ret WAG 2506 -2.70E-05 1.44E-02 -1.38E+01 4.90E-02 2.82E+02 9.80E-02
Table 5.1: Descriptive statistics of historical return series of S&P 500 and nine assets included
during a time interval from January 1991 to December 2000 (smaller reference sample of
chapter (3))

Statistic Statistic Statistic Statistic Std. Error Statistic Std. Error
ret SP500 5736 1.46E-04 4.61E-03 -1.94E+00 3.20E-02 4.15E+01 6.50E-02
ret BMY 5736 -7.90E-05 1.08E-02 -1.27E+01 3.20E-02 3.54E+02 6.50E-02
ret CVX 5736 6.30E-05 8.71E-03 -1.43E+01 3.20E-02 4.87E+02 6.50E-02
ret HPQ 5736 2.10E-05 1.20E-02 -6.49E+00 3.20E-02 1.51E+02 6.50E-02
ret KO 5736 -1.00E-05 1.10E-02 -2.02E+01 3.20E-02 6.87E+02 6.50E-02
ret MMM 5736 0.00E+00 9.32E-03 -1.73E+01 3.20E-02 5.53E+02 6.50E-02
ret PG 5736 1.60E-05 1.06E-02 -1.69E+01 3.20E-02 4.61E+02 6.50E-02
ret SGP 5736 -8.80E-05 1.30E-02 -1.16E+01 3.20E-02 2.66E+02 6.50E-02
ret TXN 5736 -8.00E-05 1.66E-02 -8.69E+00 3.20E-02 2.09E+02 6.50E-02
ret WAG 5736 2.40E-05 1.12E-02 -1.29E+01 3.20E-02 3.38E+02 6.50E-02
Table 5.2: Descriptive statistics of historical return series of S&P 500 and nine assets included
during a time interval from July 1985 to April 2008 (bigger reference sample of chapter (3))
171
ret SP500 2000 -2.85E-05 4.82E-03 5.34E-02 5.47E-02 2.48E+00 1.09E-01
ret BMY 2000 -2.38E-04 9.03E-03 -2.08E+00 5.47E-02 2.44E+01 1.09E-01
ret CVX 2000 -1.09E-05 9.13E-03 -1.78E+01 5.47E-02 5.78E+02 1.09E-01
ret HPQ 2000 -2.51E-04 1.32E-02 -4.37E+00 5.47E-02 9.46E+01 1.09E-01
ret KO 2000 5.27E-05 5.74E-03 -1.83E-01 5.47E-02 2.78E+00 1.09E-01
ret MMM 2000 -4.79E-05 9.33E-03 -1.86E+01 5.47E-02 6.20E+02 1.09E-01
ret PG 2000 5.12E-06 8.73E-03 -2.07E+01 5.47E-02 7.15E+02 1.09E-01
ret SGP 2000 -2.36E-04 1.03E-02 -2.10E+00 5.47E-02 2.40E+01 1.09E-01
ret TXN 2000 -3.56E-04 1.62E-02 -3.17E+00 5.47E-02 6.61E+01 1.09E-01
ret WAG 2000 6.89E-05 7.69E-03 -4.58E-01 5.47E-02 6.81E+00 1.09E-01
ret MCD 2000 1.24E-04 7.43E-03 -1.92E-01 5.47E-02 5.15E+00 1.09E-01
ret C 2000 -1.06E-04 8.58E-03 -2.01E-01 5.47E-02 6.97E+00 1.09E-01
ret OXY 2000 4.61E-04 7.88E-03 -1.21E-01 5.47E-02 8.12E-01 1.09E-01
ret DE 2000 -2.06E-04 1.15E-02 -1.18E-01 5.47E-02 6.47E+00 1.09E-01
ret PNC 2000 1.42E-04 7.33E-03 -4.90E-01 5.47E-02 7.33E+00 1.09E-01
ret NBL 2000 3.44E-04 9.01E-03 -2.36E-01 5.47E-02 1.77E+00 1.09E-01
ret PH 2000 2.19E-04 8.36E-03 -7.08E-02 5.47E-02 3.94E+00 1.09E-01
Table 5.3: Descriptive statistics of historical return series of S&P 500 and nine assets in-
cluded during a time interval from 12.04.2000 to 31.03.2008 (sample consisting of N = 2000
observations used in chapter (4))

ret DOW 2000 6.02E-06 4.63E-03 -3.83E-02 5.47E-02 3.55E+00 1.09E-01
ret AA 2000 3.09E-05 9.80E-03 -2.96E-03 5.47E-02 2.09E+00 1.09E-01
ret BA 2000 8.33E-05 8.36E-03 -7.80E-01 5.47E-02 7.34E+00 1.09E-01
ret CAT 2000 3.18E-04 8.13E-03 -2.46E-01 5.47E-02 4.49E+00 1.09E-01
ret GM 2000 -3.06E-04 1.11E-02 5.35E-02 5.47E-02 4.90E+00 1.09E-01
ret HON 2000 1.17E-04 9.50E-03 2.18E-02 5.47E-02 1.59E+01 1.09E-01
ret JNJ 2000 1.10E-04 5.31E-03 -1.20E+00 5.47E-02 2.18E+01 1.09E-01
ret MCD 2000 1.65E-04 7.17E-03 -2.89E-01 5.47E-02 5.39E+00 1.09E-01
ret WMT 2000 4.62E-05 6.78E-03 2.57E-01 5.47E-02 2.78E+00 1.09E-01
ret XOM 2000 1.84E-04 6.38E-03 -2.69E-01 5.47E-02 2.53E+00 1.09E-01
ret HD 2000 -1.54E-04 9.73E-03 -1.77E+00 5.47E-02 2.92E+01 1.09E-01
ret INTC 2000 -2.25E-04 1.22E-02 -6.62E-01 5.47E-02 8.39E+00 1.09E-01
ret AIG 2000 -2.52E-04 8.47E-03 -2.79E-01 5.47E-02 6.08E+00 1.09E-01
Table 5.4: Descriptive statistics of historical return series of Dow Jones Industrial Average
and 12 assets included during a time interval from 16.08.2000 to 31.07.2008 (sample consisting
of N = 2000 observations used in chapter (4))
172
ret NASDAQ 2000 -1.10E-04 7.37E-03 3.81E-01 5.50E-02 4.73E+00 1.09E-01
ret AAPL 2000 4.17E-04 1.44E-02 -5.43E+00 5.50E-02 1.19E+02 1.09E-01
ret INTC 2000 -2.25E-04 1.22E-02 -6.62E-01 5.50E-02 8.39E+00 1.09E-01
ret MSFT 2000 -3.50E-05 8.70E-03 1.74E-01 5.50E-02 7.79E+00 1.09E-01
ret CSCO 2000 -2.29E-04 1.29E-02 2.82E-01 5.50E-02 6.67E+00 1.09E-01
ret CEPH 2000 1.02E-04 1.15E-02 -3.63E-01 5.50E-02 4.50E+00 1.09E-01
ret PERY 2000 2.76E-04 1.40E-02 -2.20E-01 5.50E-02 1.53E+01 1.09E-01
ret HSIC 2000 3.87E-04 8.38E-03 2.07E-01 5.50E-02 4.76E+00 1.09E-01
ret QQQQ 2000 -1.51E-04 8.66E-03 1.92E-01 5.50E-02 5.05E+00 1.09E-01
ret ONNN 2000 -1.64E-04 2.16E-02 2.02E-01 5.50E-02 6.32E+00 1.09E-01
Table 5.5: Descriptive statistics of historical return series of NASDAQ Composite and 9 assets
included during a time interval from 15.08.2000 to 31.07.2008 (sample consisting of N = 2000
observations used in chapter (4))

ret AORD 1398 1.69E-04 3.77E-03 -5.59E-01 6.54E-02 7.26E+00 1.31E-01
ret CBA 1398 -4.00E-04 2.16E-02 -3.39E+01 6.54E-02 1.23E+03 1.31E-01
ret BBG 1398 1.62E-04 7.50E-03 5.27E-02 6.54E-02 4.72E+00 1.31E-01
ret AAC 1398 3.68E-04 9.67E-03 2.74E-01 6.54E-02 4.39E+00 1.31E-01
ret IIF 1398 -4.79E-05 6.18E-03 -2.72E-01 6.54E-02 8.10E+00 1.31E-01
ret MOF 1398 -8.33E-05 6.99E-03 -9.28E-01 6.54E-02 1.09E+01 1.31E-01
ret NCM 1398 -8.33E-05 6.99E-03 -9.28E-01 6.54E-02 1.09E+01 1.31E-01
ret ABP 1398 9.02E-05 6.13E-03 -3.07E-02 6.54E-02 5.47E+00 1.31E-01
ret AGK 1398 8.17E-05 7.05E-03 -8.13E+00 6.54E-02 1.69E+02 1.31E-01
ret BLD 1398 7.02E-05 6.97E-03 1.36E-01 6.54E-02 1.79E+00 1.31E-01
ret NDO 1398 1.10E-03 5.53E-02 2.16E-01 6.54E-02 2.16E+01 1.31E-01
ret CEY 1398 4.57E-04 1.07E-02 -1.14E+00 6.54E-02 1.34E+01 1.31E-01
ret CSR 1398 -3.21E-04 1.84E-02 -2.58E+01 6.54E-02 8.49E+02 1.31E-01
ret FCL 1398 -2.35E-05 9.85E-03 -1.69E+00 6.54E-02 3.58E+01 1.31E-01
ret AXA 1398 2.43E-04 7.77E-03 7.45E-01 6.54E-02 8.15E+00 1.31E-01
Table 5.6: Descriptive statistics of historical return series of AORD (ASX) and 14 assets
included during a time interval from February 2003 to end of August 2008 (sample consisting
of N = 1398 observations used in chapter (4))
173
A 2000 -1.14E-04 2.30E-03 5.24E-01 5.50E-02 3.43E+00 1.09E-01
Eur 2000 -1.05E-04 1.93E-03 1.00E-03 5.50E-02 2.63E+00 1.09E-01
GBP 2000 -5.30E-05 1.74E-03 5.30E-02 5.50E-02 2.14E+00 1.09E-01
BrR 2000 -1.80E-04 3.88E-03 -1.15E+00 5.50E-02 2.36E+01 1.09E-01
CHFR 2000 -8.80E-05 2.18E-03 -1.24E-01 5.50E-02 2.58E+00 1.09E-01
CHY 2000 -3.60E-05 3.05E-04 -1.25E+01 5.50E-02 3.39E+02 1.09E-01
indoRu 2000 0.00E+00 2.41E-03 1.03E+00 5.50E-02 3.20E+01 1.09E-01
indRu 2000 -4.10E-05 9.75E-04 -8.20E-02 5.50E-02 7.63E+00 1.09E-01
JPY 2000 -4.40E-05 1.93E-03 -1.97E-01 5.50E-02 2.64E+00 1.09E-01
Table 5.7: Descriptive statistics of historical currency exchange rate series during a time
interval from 19.10.2002 to 10.04.2008 (sample consisting of N = 2000 observations used in
chapter (4))

ret synth1 2507 6.86E-05 1.45E-02 -1.59E+00 4.89E-02 3.45E+01 9.77E-02
ret synth2 2507 2.93E-04 1.83E-02 -5.45E-01 4.89E-02 1.20E+01 9.77E-02
ret synth3 2507 2.30E-04 1.30E-02 1.70E-01 4.89E-02 1.12E+01 9.77E-02
ret synth4 2507 -7.74E-05 1.28E-02 1.17E-01 4.89E-02 5.03E+00 9.77E-02
ret synth5 2507 6.61E-05 1.72E-02 -3.41E-02 4.89E-02 3.26E+00 9.77E-02
ret synth6 2507 1.35E-04 1.30E-02 1.74E-01 4.89E-02 7.80E+00 9.77E-02
Table 5.8: Descriptive statistics of 6 exemplary synthetic samples (sample consisting of N =

2507 observations used in chapter (4))
174

Tail Dependence

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Eidgenössische Technische Hochschule Zürich

Swiss Federal Institute of Technology Zurich

Department of Management, Technology, and Economics - DMTEC

2 Important Concepts used in Multivariate Extreme Value Theory 4

3 Concepts for the Estimation of Tail Dependence 11

4 Application of Concepts to various Data and Purposes 127

5 Concluding Remarks 156

Important Concepts used in

lim n[1 − F (an,1 + bn,1 · x1 , . . . , an,d + bn,d · xd )] = − log G (x1 , . . . , xd ) (2.5)

lim n[1 − F (ãn,1 + b̃n,1 · x1 , . . . , ãn,d + b̃n,d · xd )] = − log G (x1 , . . . , xd ) (2.6)

2.2 The Survival Function

2.3 Multivariate Dependence

2.3.1 Positive Orthant Dependence

Generally X is positively orthant dependent if for all x = (x1 , . . . , xd ) ∈ Rd both

for all x ∈ Rd and equation (2.12) is equivalent to:

F (x1 , . . . , xd ) ≥ F 1 (x1 ) · · · F d (xd ) (2.14)

2.3.2 Quadrant Dependence

and negatively quadrant dependent (NQD) if:

∀(x, y) ∈ R2 FX,Y ≤ FX (x) · FY (y), (2.16)

2.3.3 Associated Variables

and (asymptotic) total dependence:

G (x1 , . . . , xd ) = min {G1 (x1 ) , . . . , Gd (xd )} (2.20)

provided that Gi are standard Gumbel distributions or

G(1, . . . , 1) = G1 (1), · · · Gd (1) = exp(−d) (2.23)

provided that Gi are Fréchet distributions or

G(−1, . . . , −1) = G1 (−1), · · · Gd (−1) = exp(−d) (2.24)

2.4.1 Copula and Survival Copula

FX,Y (x, y) = Pr(X ≤ x, Y ≤ y)

F X,Y (x, y) = 1 − FX (x) − FY (y) + FX,Y (x, y)

2.4.2 Empirical Copula

Concepts for the Estimation of Tail

return(t) = log(price(t)) − log(price(t − 1)), (3.1)

3.1 Approaches according to Poon, Rockinger, and Tawn

3.1.1 Theoretical Background

Dependence Measures for Multivariate Extreme

S = −1/ log (FX (X)) T = −1/ log (FY (Y )) , (3.2)

χ = lim Pr(T > s | S > s) (3.3)

Non-Parametric Estimation of χ and χ

Pr(Y > y) = L(y) · y −α for y > k, (3.7)

where L(y) is a slowly varying function of y, that is

Then tail index α is estimated by Hill’s estimator:

3.1.2 Implementation of Non-Parametric χ and χ

F X (x) = L(x) · x−α (3.20)

and α estimated by Hill’s estimator given by:

tail 1...k c...k 1...k c...k

upper tail σ̂ upper tail σ̂ lower tail σ̂ lower tail σ̂

tail 1...k c...k 1...k c...k

3.2.1 Theoretical Background

The Non-Parametric Approach by Sornette & Malevergne

F Y (y) = L(y) ∗ y −α (3.38)

where L(y) is a slowly varying function, i.e.

with l given by equation (3.36). To obtain λ− the limit u → 1− has to be replaced by

The Parametric Approach by Sornette & Malevergne

Tail Dependence between two Assets related by a Factor Model

λij = min{λi , λj } (3.46)

Estimation of Tail Indexes

log(Rank − 1/2) = a − b̂γn · log(Size), (3.52)

ν bγn ν bγn ν bγn ν bγn

bγn k=229 k=229

where constant l was non-parametrically estimated by:

ˆl = FX−1 (u) ∼ Xk,N

3.2.3 Analysis of TDC estimated by the Non-Parametric Approach

Estimation of Error Bars

0.4 0.5 0.2