How often is the financial market going to collapse?

Abstract

Copula theory is used to investigate the phenomenon of extremal dependence. An analyticalexpression for the extremal-dependence coe cient (EDC) of regularly varying elliptically distributedrandom vectors is derived. The EDC represents a natural measure of systemic risk. Extreme valuetheory is applied in order to estimate the systemic risk of the G–7 countries. The given results arequite sensitive to the tail index of asset returns and thus a scenario analysis is conducted. In the worstcase, the probability that the entire market crashes during 10 years exceeds 50%. Hence, we must notneglect the risk of a financial collapse during a relatively short period of time.

Keywords

• copula theory| extremal dependence| extreme value theory| ruin| tail dependence