Measuring Asymmetric Tails Under Copula Distributions

Abstract

Extensive evidence has been gathered showcasing the prevalence of heavy-tailed distributions and asymmetric tail interdependence within equity and foreign exchange markets, particularly during times of crisis. Tail interdependence in financial markets often manifests as financial contagion, characterized by periods where declining prices and heightened volatility propagate across economic and financial sectors. This phenomenon causes markets that typically exhibit minimal or no correlation to behave similarly, often in opposition to fundamental principles. Instances of unwarranted contagion present a perplexing challenge, suggesting irrationality among market participants and defying conventional risk management strategies and optimal portfolio selections. Our objective is to construct a comprehensive framework for dissecting such occurrences, utilizing a metric of tail-nonexchangeable dependencies employing various copulas with diverse marginal distributions. We offer analytical insights into our measurement of tail order dependence to aid in understanding these events.