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Hedging the Black Swan: conditional heteroscedasticity and tail dependence in S&P500 and VIX

Research output: Contribution to Journal/Magazine › Journal article › peer-review

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Hedging the Black Swan: conditional heteroscedasticity and tail dependence in S&P500 and VIX. / Abbas, Sawsan; Poon, Ser-Huang; Tawn, Jonathan Angus.
In: Journal of Banking and Finance, Vol. 35, No. 9, 09.2011, p. 2374-2387.

Research output: Contribution to Journal/Magazine › Journal article › peer-review

Harvard

Abbas, S, Poon, S-H & Tawn, JA 2011, 'Hedging the Black Swan: conditional heteroscedasticity and tail dependence in S&P500 and VIX', Journal of Banking and Finance, vol. 35, no. 9, pp. 2374-2387. https://doi.org/10.1016/j.jbankfin.2011.01.035

APA

Abbas, S., Poon, S-H., & Tawn, J. A. (2011). Hedging the Black Swan: conditional heteroscedasticity and tail dependence in S&P500 and VIX. Journal of Banking and Finance, 35(9), 2374-2387. https://doi.org/10.1016/j.jbankfin.2011.01.035

Vancouver

Abbas S, Poon S-H, Tawn JA. Hedging the Black Swan: conditional heteroscedasticity and tail dependence in S&P500 and VIX. Journal of Banking and Finance. 2011 Sept;35(9):2374-2387. Epub 2011 Feb 11. doi: 10.1016/j.jbankfin.2011.01.035

Author

Abbas, Sawsan ; Poon, Ser-Huang ; Tawn, Jonathan Angus. / Hedging the Black Swan : conditional heteroscedasticity and tail dependence in S&P500 and VIX. In: Journal of Banking and Finance. 2011 ; Vol. 35, No. 9. pp. 2374-2387.

Bibtex

@article{1ff7a4a74941443fa674fe347256ec08,
title = "Hedging the Black Swan: conditional heteroscedasticity and tail dependence in S&P500 and VIX",
abstract = "The recent financial crisis has accentuated the fact that extreme outcomes have been overlooked and not dealt with adequately. While extreme value theories have existed for a long time, the multivariate variant is difficult to handle in the financial markets due to the prevalent heteroskedasticity embedded in most financial time series, and the complex extremal dependence that cannot be conveniently captured by a single structure. Moreover, most of the existing approaches are based on a limiting argument in which all variables become large at the same rate. In this paper, we show how the conditional approach of Heffernan and Tawn (2004) can be implemented to model extremal dependence between financial time series. We use a hedging example based on VIX futures to demonstrate the flexibility and superiority of the conditional approach against the conventional OLS regression approach.",
keywords = "Financial time series, Extreme value theory, Extremal dependence structure, Downside risk, Optimal hedge ratio",
author = "Sawsan Abbas and Ser-Huang Poon and Tawn, {Jonathan Angus}",
year = "2011",
month = sep,
doi = "10.1016/j.jbankfin.2011.01.035",
language = "English",
volume = "35",
pages = "2374--2387",
journal = "Journal of Banking and Finance",
issn = "0378-4266",
publisher = "Elsevier",
number = "9",

}

RIS

TY - JOUR

T1 - Hedging the Black Swan

T2 - conditional heteroscedasticity and tail dependence in S&P500 and VIX

AU - Abbas, Sawsan

AU - Poon, Ser-Huang

AU - Tawn, Jonathan Angus

PY - 2011/9

Y1 - 2011/9

N2 - The recent financial crisis has accentuated the fact that extreme outcomes have been overlooked and not dealt with adequately. While extreme value theories have existed for a long time, the multivariate variant is difficult to handle in the financial markets due to the prevalent heteroskedasticity embedded in most financial time series, and the complex extremal dependence that cannot be conveniently captured by a single structure. Moreover, most of the existing approaches are based on a limiting argument in which all variables become large at the same rate. In this paper, we show how the conditional approach of Heffernan and Tawn (2004) can be implemented to model extremal dependence between financial time series. We use a hedging example based on VIX futures to demonstrate the flexibility and superiority of the conditional approach against the conventional OLS regression approach.

AB - The recent financial crisis has accentuated the fact that extreme outcomes have been overlooked and not dealt with adequately. While extreme value theories have existed for a long time, the multivariate variant is difficult to handle in the financial markets due to the prevalent heteroskedasticity embedded in most financial time series, and the complex extremal dependence that cannot be conveniently captured by a single structure. Moreover, most of the existing approaches are based on a limiting argument in which all variables become large at the same rate. In this paper, we show how the conditional approach of Heffernan and Tawn (2004) can be implemented to model extremal dependence between financial time series. We use a hedging example based on VIX futures to demonstrate the flexibility and superiority of the conditional approach against the conventional OLS regression approach.

KW - Financial time series

KW - Extreme value theory

KW - Extremal dependence structure

KW - Downside risk

KW - Optimal hedge ratio

U2 - 10.1016/j.jbankfin.2011.01.035

DO - 10.1016/j.jbankfin.2011.01.035

M3 - Journal article

VL - 35

SP - 2374

EP - 2387

JO - Journal of Banking and Finance

JF - Journal of Banking and Finance

SN - 0378-4266

IS - 9

ER -