Research On Tail Risk Measurement And Tail Correlation Of China’s Stock Market

The extreme events have made enormous impact on financial markets, China’s stock markethave lost in the2008financial crisis, So far it still fails to get out of the quagmire ofdevelopment. Tail risk caused by extreme events now attracts more and more concerns on themajority of scholars and financial regulatory authorities. How to measure tail risk, nowadays, itis a important issue for scholars.Now, VaR (Value at Risk) is an international risk measurement standard worldwide.Indiscriminate to use VaR for tail risk measurement will cause serious consequences of the riskby underestimated it. While, with the development of financial risk measurement theory, it isconsidered to be a good risk measure indicator if the indicator meets the consistency four axioms.These consistency criteria tail risk measurement tools include the CVaR, ER, ES, TCE, TM andother indicators, after analyzing the pros and cons of each indicator, this paper briefly chooseVaR based on extreme value theory and ES as the tail risk measurement tool.By measuring and analyzing the tail of the stock market, it makes more comprehensive andmore profound to understand the stock market tail risk. Copula function is good at capturing therelationship between variables in forms of non-linear, asymmetric and tail characteristics, So it iswidely used to measure the tail correlation between the assets or stock markets.The empirical analysis is divided into two parts, the first one is based on the POT model byimproved threshold selection method to calculate VaR and ES. Back-testing results show thatPOT-VaR without improved threshold selection method is not as effective as the former. Thesecond part adopts the copula theory, measuring the correlation among the Shanghai CompositeIndex, the Hang Seng Index and the Nasdaq index. The results show that China’s stock markethave obvious tail dependence with outside developed stock market, and present asymmetricfeatures, the upper tail correlation is large than the lower tail correlation.