Modelling dependence of extreme events in energy markets using tail copulas
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Date
2011-02-03
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Abstract
This paper studies, for the first time, the dependence of extreme
events in energy markets. Based on a large data set comprising quotes
of crude oil and natural gas futures, we estimate and model large
co-movements of commodity returns. To detect the presence of tail
dependence we apply a new method based on the concept of tail copulas
which accounts for different scenarios of joint extreme outcomes.
Moreover, we show that the common practice to fit copulas to the
data cannot capture the dynamics in the tail of the joint distribution
and, therefore, is unsuitable for risk management purposes.
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Keywords
Extreme events, Crude oil, Natural gas, Tail copulas, Tail dependence