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How often is the financial market going to collapse?

Helmut Schmidt University, Department of Mathematics and Statistics, Holstenhofweg 85, D–22043 Hamburg, Germany

Special Issue: Systemic Risk Measurement

Copula theory is used to investigate the phenomenon of extremal dependence. An analytical expression for the extremal-dependence coe cient (EDC) of regularly varying elliptically distributed random vectors is derived. The EDC represents a natural measure of systemic risk. Extreme value theory is applied in order to estimate the systemic risk of the G–7 countries. The given results are quite sensitive to the tail index of asset returns and thus a scenario analysis is conducted. In the worst case, the probability that the entire market crashes during 10 years exceeds 50%. Hence, we must not neglect the risk of a financial collapse during a relatively short period of time.
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Keywords copula theory; extremal dependence; extreme value theory; ruin; tail dependence

Citation: Gabriel Frahm. How often is the financial market going to collapse?. Quantitative Finance and Economics, 2018, 2(3): 590-614. doi: 10.3934/QFE.2018.3.590


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