Abstract

Risk transmission among financial markets and their participants is time-evolving, e

specially for extreme risk scenarios. Possibly sudden time variation of such risk structures asks

for quantitative techniques that can cope with such situations. Here we present a novel localized

multivariate CAViaR-type model to respond to the challenge of time-varying risk contagion. For

this purpose, we construct a test for parameter homogeneity with totally data-driven critical values. We prove that these critical values lead to the required confidence level. Based on this test,

we propose an estimation procedure that adapts to a possible time-variation of the parameter. A

comprehensive simulation study supports the effectiveness of our approach in detecting structural

changes in multivariate CAViaR. Finally, when applying for the US and German financial markets,

we can trace out the dynamic tail risk spillovers and find that the US market appears to play a

dominant role in risk transmissions, especially in volatile market periods.

Information

Preprint No.SS-2022-0397
Manuscript IDSS-2022-0397
Complete AuthorsXiu Xu, Yegor Klochkov, Li Chen, Wolfgang Karl Härdle
Corresponding AuthorsLi Chen
Emailslichen812@xmu.edu.cn

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Acknowledgments

Xiu Xu acknowledges the support of Natural Science Foundation of China (NSFC, Grant

Numbers: 72273095, 71803140). Li Chen gratefully acknowledges the support of the National Natural Science Foundation of China (NSFC, Grant Numbers: 72103173, 72033008,

and 72233002). This paper was supported through ”IDA Institute of Digital Assets”,

CF166/15.11.2022, contract number 760046/23.05.2023, financed under the Romania’s

National Recovery and Resilience Plan, Apel nr. PNRR-III-C9-2022-I8. We gratefully

acknowledge the support of the Marie Sklodowska-Curie Actions under the European

Union’s Horizon Europe research and innovation program for the Industrial Doctoral

Network on Digital Finance, acronym: DIGITAL, Project No. 101119635.

Supplementary Materials

The online Supplementary Material includes the appendix for proofs.

Supplementary materials are available for download.