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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

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

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.

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 /:

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 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

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

3 Tail Dependence

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 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

u!0C u!0C

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

U D lim D lim ;

u!1 1u u!1 1 ˚ 1 .˚.u//

where

and

1 u D 1 ˚ 1 .˚.u//:

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

C.u; u/ ˚ 1 .2˚.u//

L D lim D lim 1

:

u!0C u u!0C ˚ .˚.u//

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/

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

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˚

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/

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 ˚

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 .

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//

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 /

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

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

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

//

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.

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

˚ 1 .t/ D 1 Œ1 .1 C t/1= 1= :

The bivariate upper tail dependence coefficient, see (5), is

U D 2 21= ;

L D 21= :

Multivariate Tail Dependence Coefficients for Archimedean Copulae 295

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.

References

Campbell, R., Koedijk, K., Kofman, P.: Increased correlation in bear markets. Financ. Anal. J.,

January-February, 87–94 (2002)

Cherubini, U., Luciano, E., Vecchiato, W.: Copula Methods in Finance. John Wiley & Sons, (2004)

Coles, S., Heffernan, J., Tawn, J.: Dependence measures for extreme value analysis. Extremes 2,

339–366 (1999)

Dobrı́c, J., Schmid, F.: Non parametric estimation of the lower tail dependence L in bivariate

copulas. J. Appl. Stat. 32, 387–407 (2005)

Einmahl, J., de Haan, L., Piterbarg, V.: Multivariate extremes estimation. Ann. Stat. 29, 1401–1423

(2001)

Embrechts, P., Lindskog, F., McNeil, A.: Modelling Dependence with Copulas and Applications

to Risk Management. In Rachev S. (eds), Handbook of Heavy Tailed Distributions in Finance,

pp. 329-384 (2003)

Engle, R.F.: Dynamic conditional correlation: a simple class of multivariate generalized autore-

gressive conditional heteroscedasticity models. J. Bus. Econ. Stat. 20, 339–350 (2002)

Hall, P., Tajvidi, N.: Disribution and dependence-function estimation for bivariate extreme-value

distributions. Bernoulli 6, 835–844 (2000)

Joe, H.: Multivariate Models and Dependence Concepts. Chapman & Hall/CRC, New York (1997)

Longin, F., Solnik, B.: Extreme correlation of international equity markets. J. Financ. 56, 649–676

(2001)

296 G. De Luca and G. Rivieccio

Peng, L.: Estimation of the coefficient of tail dependence in bivariate extremes. Statist. Probab.

Lett. 43, 349–409 (1999)

Pickands, J.: Multivariate extreme value distributions. Proceedings of the 43rd Session ISI

(Buoneos Aires), 399–409 (1981)

L KizL ek, P., Härdle, W., Weron, R. (eds), Statistical tools in finance

Schmidt, R.: Tail Dependence. In C

and insurance, pp. 65-91, Springer Verlag, Heidelberg (2005)

Schmidt, R., Stadmüller, U.: Non-parametric Estimation of Tail Dependence. Scand. J. Stat.

33,307–335 (2005)

Tse, Y.K., Tsui, A.K.C.: A Multivariate Generalized Autoregressive Conditional

Heteroscedasticity model with time-varying correlations. J. Bus. Econ. Stat. 20, 351–362

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