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Multivariate Tail Dependence Coefficients

for Archimedean Copulae

Giovanni De Luca and Giorgia Rivieccio

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

G. De Luca  G. Rivieccio ()


Department of Statistics and Mathematics for Economic Research, Parthenope University,
via Medina 40, 80133 Napoli, Italy
e-mail: giovanni.deluca@uniparthenope.it; giorgia.rivieccio@uniparthenope.it

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

extreme returns of a couple of assets modelled by a bivariate copula function (e.g.


Schmidt (2005) and Cherubini et al. (2004)).
In this paper, we focus on the tail dependence in a multivariate context providing
the general expressions of the coefficients for Archimedean copulae in terms of
their generator function. Finally, we apply these formulae to some multivariate
biparametric (MB) Archimedean copulae.

2 Archimedean Survival Copulae

A copula function C is a multivariate distribution function defined on the unit cube


Œ0; 1n , with uniformly distributed margins (see Joe 1997 and Nelsen 2006). The well
known Sklar’s Theorem shows the relationship between the copula function, C, and
the n-dimensional function H of the random variables X1 ; : : : ; Xn with domain RN n ,
such that H is grounded, n-increasing and H.1; : : : ; 1/ D 1, defined as

H.x1 ; : : : ; xn / D P .X1  x1 ; : : : ; Xn  xn /:

According to the theorem, there exists an n-dimensional copula function C such


that for all x in RN n
H.x1 ; : : : ; xn / D C.u1 ; : : : ; un / (1)
where ui is the uniform marginal distribution Fi .Xi /. Moreover, by Sklar’s the-
orem, it is possible to derive the relationship between the survival joint function,
HN .x1 ; : : : ; xn /, and the survival copula function, CO .1  u1 ; : : : ; 1  un /.
The survival joint function is given by

HN .x1 ; : : : ; xn / D P .X1 > x1 ; : : : ; Xn > xn /

and it follows from (1) that

HN .x1 ; : : : ; xn / D CO .1  u1 ; : : : ; 1  un /:

For n D 2, it has been shown that the survival copula function

CO .1  u1 ; 1  u2 / D Œ1  P .U1  u1 / C Œ1  P .U2  u2 /
Œ1  P .U1  u1 ; U2  u2 / (2)

is strictly related to the copula function through the relationship

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

C.u1 ; : : : ; un / D ˚ 1 .˚.u1 / C : : : C ˚.un //:

Archimedean copulae share the important features to be symmetric and associative.


For our purposes, we generalize the expression of the survival copula CO for an
Archimedean copula C with generator function ˚, that is
8 ! 2 0 139
n <
X X i =
n
CO .1  u1 ; : : : ; 1  un / D .1/i 4˚ 1 @ ˚.uj /A5 ; (4)
: ni ;
i D0 j D0

where ˚ 1 .˚.u0 // D 1 and ˚ 1 .˚.u1 // D u1 .

3 Tail Dependence

The tail dependence is a measure of concordance between less probable values of


variables. This concordance tends to concentrate on the lower and upper tails of the
joint distribution.
Definition 1. In a bivariate context, let Fi .Xi /, i D 1; 2, be the marginal distribu-
tion functions of two random variables X1 and X2 and let u be a threshold value;
then the upper tail dependence coefficient, U , is defined as

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

P .U1 > u; U2 > u/


P .U1 > u jU2 > u/ D
P .U2 > u/
1  P .U1  u/  P .U2  u/ C P .U1  u; U2  u/
D ;
1  P .U2  u/
290 G. De Luca and G. Rivieccio

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

In a similar way, the lower tail dependence coefficient, L , is defined as

L D lim P .F1 .X1 /  ujF2 .X2 /  u/ D lim P .U1  ujU2  u/


u!0C u!0C

P .U1  u; U2  u/
D lim
u!0C P .U2  u/

and in terms of copula function as

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

1  2u C C.u; u/ 1  2˚ 1 .˚.u// C ˚ 1 .2˚.u//


U D lim D lim ;
u!1 1u u!1 1  ˚ 1 .˚.u//

where

C.u; u/ D ˚ 1 .˚.u/ C ˚.u// D ˚ 1 .2˚.u//

and

1  u D 1  ˚ 1 .˚.u//:

To solve the limit, it is necessary to apply de L’HOopital theorem,


0 0
2˚ 1 .˚.u//.˚ 0 .u// C ˚ 1 .2˚.u//2.˚ 0 .u//
U D lim
u!1 ˚ 10 .˚.u//˚ 0 .u/
0 0
2˚ 1 .˚.u//.˚ 0 .u// ˚ 1 .2˚.u//2.˚ 0 .u//
D lim 0 C
u!1 ˚ 1 .˚.u//˚ 0 .u/ ˚ 10 .˚.u//˚ 0 .u/
0 0
˚ 1 .2˚.u// ˚ 1 .2t/
D 2  2 lim 10 D 2  2 lim 10 .t/
: (5)
u!1 ˚ .˚.u// t !0C ˚
Multivariate Tail Dependence Coefficients for Archimedean Copulae 291

The lower tail dependence coefficient is given by

C.u; u/ ˚ 1 .2˚.u//
L D lim D lim 1
:
u!0C u u!0C ˚ .˚.u//

By applying de L’HOopital theorem, the solution of the limit is


0 0
˚ 1 .2˚.u//.2˚ 0 .u// ˚ 1 .2t/
L D lim 0 D 2 lim 0 : (6)
u!0C ˚ 1 .˚.u//˚ 0 .u/ t !1 ˚ 1 .t/

Note that the associative property implies that

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

> u; : : : ; Fn .Xn / > u/


CO n .1  u; : : : ; 1  u/
D lim :
u!1 CO nh .1  u; : : : ; 1  u/

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˚

and after applying de L’HOopital theorem, we obtain


Pn n h 
0
io
i D1 i .1/i ˚ 1 .i t/
n
ni
U1:::hjhC1:::n D lim P n o : (7)
t !0C nh  nh  i  10
i D1 nhi i .1/ ˚ .i t/

The corresponding multivariate lower tail dependence coefficient is defined as


292 G. De Luca and G. Rivieccio

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 ˚

Exploiting de L’HOopital theorem, the result is


0
1:::hjhC1:::n n ˚ 1 .nt/
L D lim 10 : (8)
n  h t !1 ˚ ..n  h/t/

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 .

An example. When n D 4 variables and h D 1, the upper tail dependence


coefficient is

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//

Applying de L’HOopital theorem,


0 0 0
4˚ 1 .˚.u//˚ 0 .u/C6˚ 1 .2˚.u//2˚ 0 .u/4˚ 1 .3˚.u//3˚ 0 .u/
1j234 D lim C
U
u!1 3˚ 10 .˚.u//˚ 0 .u/C3˚ 10 .2˚.u//2˚ 0 .u/˚ 10 .3˚.u//3˚ 0 .u/
0
˚ 1 .4˚.u//4˚ 0 .u/
C
3˚ .˚.u//˚ .u/ C 3˚ 10 .2˚.u//2˚ 0 .u/  ˚ 10 .3˚.u//3˚ 0 .u/
1 0 0

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 /

In a similar way, the lower tail dependence coefficient, with n D 4 and h D 1, is

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

and applying de L’HOopital theorem,


0
˚ 1 .4˚.u//.4˚ 0 .u//
1j234
L D lim 10 .3˚.u//.3˚ 0 .u//
u!0C ˚
0
4 ˚ 1 .4t/
D lim 10 : (10)
3 t !1 ˚ .3t/

The associative property guarantees the invariance of the coefficients (9) and (10)
when we permute the four variables.

4 MB Copula Functions

Two-parameter families can be used to capture different types of dependence


structure, in particular lower or upper tail dependence or both. We consider two
multivariate bi-parametric (MB) copula functions, extending BB1 and BB7 copulae,
analyzed by Joe (1997) in the bivariate case. They are characterized by non-null
upper and lower tail dependence. The formulation of a MB copula is
1 .u / 1 .u /
C.u1 ; : : : ; un / D . log K.e  1
; : : : ; e n
//

where K is max-infinitely divisible and belongs to the class of Laplace Trans-


forms. Two-parameter families result if K and are parametrized, respectively, by
parameters  and . If K has the Archimedean copula form, then also C has the
same form.

4.1 MB1 Copula

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

4.2 MB7 Copula

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

˚.t/ D Œ1  .1  t/   1

while its inverse is


˚ 1 .t/ D 1  Œ1  .1 C t/1= 1= :
The bivariate upper tail dependence coefficient, see (5), is

U D 2  21= ;

while the bivariate lower tail dependence coefficient, see (6), is

L D 21= :
Multivariate Tail Dependence Coefficients for Archimedean Copulae 295

The generalization of the results leads to


h i
Pn n  i
i D1 ni .1/ .i /1=
1:::hjhC1:::n
U D P h i
nh  nh  i
i D1 nhi .1/ .i /1=

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.

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