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Abstract We analyze the multivariate upper and lower tail dependence coefficients,
obtained extending the existing definitions in the bivariate case. We provide their
expressions for a popular class of copula functions, the Archimedean one. Finally,
we apply the formulae to some well known copula functions used in many financial
analyses.
1 Introduction
The different relationship between positive and negative extreme events occurring
in financial markets has been studied through several papers, see e.g. Engle (2002),
Tse and Tsui (2002), Longin and Solnik (2001). In particular, in bear markets the
strength of the correlation between returns is higher than in bull markets and it
tends to increase when the markets are more volatile (Campbell et al. 2002). This
suggests a significant dependence in the tails of the joint distribution of asset returns
to analyze with an asymmetric model. A first approach involves the multivariate
Extreme Value Theory (EVT), e.g. Coles et al. (1999), Pickands (1981), Einmahl
et al. (2001), Hall and Tajvidi (2000), Peng (1999), a second one is based on the
non-parametric estimation techniques of the concordance between rare events, e.g.
Dobrı́c and Schmid (2005), Schmidt and Stadmüller (2005). Finally, a popular way
of proceeding is to model the whole dependence structure between assets with a
copula function and to measure the relationship in the tails of the joint distribution
using the upper and lower tail dependence coefficients (see e.g. Embrechts et al.
(2003)). However, the literature on this argument suggests to make use of the upper
and lower tail dependence coefficients only to measure the association between
A. Di Ciaccio et al. (eds.), Advanced Statistical Methods for the Analysis 287
of Large Data-Sets, Studies in Theoretical and Applied Statistics,
DOI 10.1007/978-3-642-21037-2 26, © Springer-Verlag Berlin Heidelberg 2012
288 G. De Luca and G. Rivieccio
H.x1 ; : : : ; xn / D P .X1 x1 ; : : : ; Xn xn /:
HN .x1 ; : : : ; xn / D CO .1 u1 ; : : : ; 1 un /:
CO .1 u1 ; 1 u2 / D Œ1 P .U1 u1 / C Œ1 P .U2 u2 /
Œ1 P .U1 u1 ; U2 u2 / (2)
CO .1 u1 ; 1 u2 / D 1 u1 u2 C C.u1 ; u2 /: (3)
Following the same reasoning, it is easy to derive the expression of the survival
copula function in a multivariate framework, showing, in particular, the relationships
Multivariate Tail Dependence Coefficients for Archimedean Copulae 289
for Archimedean copulae. The Archimedean copulae family (see Cherubini et al.
2004) can be built starting from the definition of a generator function ˚ W I D
Œ0; 1, continuous, decreasing and convex, such that ˚.1/ D 0 and where ˚ Œ1 .t/
is defined the “pseudo-inverse” of ˚.t/ W ˚ Œ1 .t/ D ˚ 1 .t/ 8t 2 Œ0; ˚.0/ and
˚ Œ1 .t/ D 0 for t ˚.0/. If ˚.0/ D 1, then ˚.t/ and C are said to be strict;
if ˚.0/ < 1, ˚.t/ and C are non-strict (for a definition, see Nelsen 2006). Let
˚ 1 .t/ be the inverse of ˚.t/ a strict generator of an Archimedean copula; then an
Archimedean copula can be expressed as
3 Tail Dependence
U D lim P .F1 .X1 / > u jF2 .X2 / > u/ D lim P .U1 > u jU2 > u/ :
u!1 u!1
When U 2 .0; 1, X1 and X2 are asymptotically dependent on the upper tail; if U
is null, X1 and X2 are asymptotically independent.
Since
then, from (2) and (3) it follows that the upper tail dependence coefficient can be
also expressed in terms of survival copula functions, that is
CO .1 u; 1 u/ 1 2u C C.u; u/
U D lim D lim :
u!1 1u u!1 1u
P .U1 u; U2 u/
D lim
u!0C P .U2 u/
C.u; u/
L D lim :
u!0C u
It is easy to show that for an Archimedean copula each tail dependence coefficient
can be derived using the generator function (e.g. Cherubini et al. 2004). In fact, if
0
the first derivative of the inverse of the generator function ˚ 1 .0/ is finite, then
an Archimedean copula does not have upper tail dependence; conversely, U is
given by
where
and
1 u D 1 ˚ 1 .˚.u//:
C.u; u/ ˚ 1 .2˚.u//
L D lim D lim 1
:
u!0C u u!0C ˚ .˚.u//
U D lim P .U1 > ujU2 > u/ D lim P .U2 > ujU1 > u/
u!1 u!1
and
L D lim P .U1 ujU2 u/ D lim P .U2 ujU1 u/:
u!0C u!0C
We propose to extend the definition introducing the multivariate upper and lower
tail dependence coefficients for Archimedean copulae.
Definition 2. A multivariate generalization of the tail dependence coefficients
consists in to consider h variables and the conditional probability associated to the
remaining n h variables, given by
1:::hjhC1:::n
U D lim P .F1 .X1 / > u; : : : ; Fh .Xh / > ujFhC1 .XhC1 /
u!1
From our definition given in (4) the upper multivariate tail dependence coefficient is
Pn ˚ n i
1
ni .1/ ˚ .i ˚.u//
D lim P i D0n
1:::hjhC1:::n
U o
u!1 nh nh i 1 .i ˚.u//
i D0 nhi .1/ Œ˚
1:::hjhC1:::n
L D lim P .F1 .X1 / u; : : : ; Fh .Xh / ujFhC1 .XhC1 /
u!0C
u; : : : ; Fn .Xn / u/
Cn .u; : : : ; u/ ˚ 1 .n˚.u//
D lim D lim 1 ..n h/˚.u//
:
u!0C Cnh .u; : : : ; u/ u!0C ˚
For the associative property, (7) and (8) hold for each of the nŠ coefficients in
correspondence of the nŠ permutations of the variables X1 ; : : : ; Xn .
1j234
U D lim P .F1 .X1 / > ujF2 .X2 / > u; F3 .X3 / > u; F4 .X4 / > u/
u!1
CO 4 .1 u; 1 u; 1 u; 1 u/
D lim
u!1 CO 3 .1 u; 1 u; 1 u/
1 4u C 6C.u; u/ 4C.u; u; u/ C C.u; u; u; u/
D lim
u!1 1 3u C 3C.u; u/ C.u; u; u/
1 4˚ 1 .˚.u// C 6˚ 1 .2˚.u// 4˚ 1 .3˚.u// C ˚ 1 .4˚.u//
D lim :
u!1 1 3˚ 1 .˚.u// C 3˚ 1 .2˚.u// ˚ 1 .3˚.u//
0 0 0 0
4˚ 1 .t / C 12˚ 1 .2t / 12˚ 1 .3t / C 4˚ 1 .4t /
D lim : (9)
t !0C 3˚ 10 .t / C 6˚ 10 .2t / 3˚ 10 .3t /
1j234
L D lim P .F1 .X1 / ujF2 .X2 / u; F3 .X3 / u; F4 .X4 / u/
u!1
C.u; u; u; u/ ˚ 1 .4˚.u//
D lim D lim 1 .3˚.u//
u!0C C.u; u; u/ u!0C ˚
Multivariate Tail Dependence Coefficients for Archimedean Copulae 293
The associative property guarantees the invariance of the coefficients (9) and (10)
when we permute the four variables.
4 MB Copula Functions
The MB1 copula is obtained letting K be the Gumbel family and the Laplace
Transform B (Joe 1997, p. 375), then
8 " n #1= 91=
< X =
C.u1 ; : : : ; un / D 1 C .u
i 1/
: ;
i D1
where > 0, 1. For D 1 we get the popular Clayton copula. The generator
function is
˚.t/ D .t 1/
and its inverse is
˚ 1 .t/ D .1 C t 1= /1= :
294 G. De Luca and G. Rivieccio
The bivariate upper and lower tail dependence coefficients (5) and (6) are,
respectively,
U D 2 21=
and
L D 21=. / :
The general expressions of the coefficients are given (see (7) and (8)) by
h i
Pn n
i D1 ni
.1/i .i /1=
U1:::hjhC1:::n D P h i
nh nh
i D1 nhi
.1/i .i /1=
and
n 1=
1:::hjhC1:::n
L D :
nh
In the second case, let K be the Clayton family and be Laplace Transform C
(Joe 1997, p. 375), then
0 " n #1= 11=
X
C.u1 ; : : : ; un / D 1 @1 .1 .1 ui / / .n 1/ A
i D1
is the MB7 copula, also known as Joe-Clayton copula, where > 0, 1. For
D 1 we get again the Clayton copula.
The generator function is
U D 2 21= ;
L D 21= :
Multivariate Tail Dependence Coefficients for Archimedean Copulae 295
and
n 1=
1:::hjhC1:::n
L D :
nh
5 Concluding Remarks
We have analyzed the upper and lower tail dependence coefficients in a multivariate
framework, providing their expressions for a widely used class of copula function,
the Archimedean copulae. The tail dependence measures can be of interest in many
fields. For instance, given n financial asset returns, the upper (lower) tail dependence
coefficient can be interpreted as the probability of very high (low) returns for h
assets provided that very high (low) returns have occurred for the remaining n h
assets. In a risk management perspective, the implementation of a strategy of risk
diversification can be helped by the knowledge of these coefficients, especially in a
financial crisis scenario.
References
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296 G. De Luca and G. Rivieccio