Extremal memory of stochastic volatility with an application to tail shape inference

Research output: Contribution to journalArticle

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Abstract

We characterize joint tails and tail dependence for a class of stochastic volatility processes. We derive the exact joint tail shape of multivariate stochastic volatility with innovations that have a regularly varying distribution tail. This is used to give four new characterizations of tail dependence. In three cases tail dependence is a non-trivial function of linear volatility memory parametrically represented by tail scales, while tail power indices do not provide any relevant dependence information. Although tail dependence is associated with linear volatility memory, tail dependence itself is nonlinear. In the fourth case a linear function of tail events and exceedances is linearly independent. Tail dependence falls in a class that implies the celebrated Hill (1975) tail index estimator is asymptotically normal, while linear independence of nonlinear tail arrays ensures the asymptotic variance is the same as the iid case. We illustrate the latter finding by simulation.

LanguageEnglish (US)
Pages663-676
Number of pages14
JournalJournal of Statistical Planning and Inference
Volume141
Issue number2
DOIs
StatePublished - Jan 1 2011

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Tail Dependence
Stochastic Volatility
Tail
Data storage equipment
Random processes
Tail Index
Innovation
Volatility
Power Indices
Exceedance
Linear independence
Asymptotic Variance
Linear Function
Stochastic volatility
Tail dependence
Inference
Linearly
Estimator
Imply
Simulation

Keywords

  • Convolution tail
  • Hill estimator
  • Stochastic volatility
  • Tail dependence

ASJC Scopus subject areas

  • Statistics and Probability
  • Statistics, Probability and Uncertainty
  • Applied Mathematics

Cite this

Extremal memory of stochastic volatility with an application to tail shape inference. / Hill, Jonathan B.

In: Journal of Statistical Planning and Inference, Vol. 141, No. 2, 01.01.2011, p. 663-676.

Research output: Contribution to journalArticle

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