Modeling Directional Dependence of Extreme Events

Music City Center 

This paper introduces a novel measure to quantify the directional dependence of extreme events between two variables. We propose a new approach to capture the asymmetric tail dependence. By studying the conditional tail expectation and of the rank transformed variables, we quantify the behaviour of one variable when the other is extreme. The effectiveness of the approach is demonstrated through an extensive simulation framework, and the theoretical asymptotic behaviour of the estimator is investigated. We apply this method to environmental and financial data, such as wind speed and temperature extremes, and stock-bond market extremes. Our results show the strong asymmetric nature of extreme events.

Directional Dependence

Tail Dependence

Copula

Tail Expectation 

Section on Risk Analysis