Assessing Maximal Dependence Within Extreme Co-Movements of Financial Instruments

Abstract

Assessing dependence within extreme co-movements of financial instruments has been of much interest in risk management. Typically, indices of tail dependence are used to quantify the strength of such dependence, although many of the indices that we find in the literature underreport the strength due to equal treatment of the instruments in the tail of their loss distributions. When this becomes an issue, we advocate the use of a procedure designed to estimate the maximal strength of dependence that can possibly occur among the co-movements. We illustrate the performance of the procedure and its implementation using simulated and real data-sets. Detailed analyses of foreign currency exchange rates, stock market indices, and treasury notes are given.