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Bormann, Carsten
Schienle, Melanie
Schaumburg, Julia
Year of Publication: 
Series/Report no.: 
Tinbergen Institute Discussion Paper 14-024/III
In practice, multivariate dependencies between extreme risks are often only assessed in a pairwise way. We propose a test to detect when tail dependence is truly high-dimensional and bivariate simplifications would produce misleading results. This occurs when a significant portion of the multivariate dependence structure in the tails is of higher dimension than two. Our test statistic is based on a decomposition of the stable tail dependence function, which is standard in extreme value theory for describing multivariate tail dependence. The asymptotic properties of the test are provided and a bootstrap based finite sample version of the test is suggested. A simulation study documents the good performance of the test for standard sample sizes. In an application to international government bonds, we detect a high tail{risk and low return situation during the last decade which can essentially be attributed to increased higher{order tail risk. We also illustrate the empirical consequences from ignoring higher-dimensional tail risk.
decomposition of tail dependence
multivariate extreme values
stable tail dependence function
subsample bootstrap
tail correlation
Document Type: 
Working Paper

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