Abstract
AbstractThis paper introduces an alternative method for assessing the quality of risk management models. Specifically, using the forecast efficiency notion that forecast errors should be independent of a pertinent information set, we consider the extent to which unanticipated downside risk (extreme risk) is independent of overseas extreme risk. This is achieved using a bootstrap version of the non‐causality test recently introduced by Hong et al. (), data covering 45 international equity markets, and by measuring extreme risk via a class of risk management models recently introduced by Xiao and Koenker (). In doing this, we find significant evidence of transmission (causality) across national borders. Moreover, we discuss how risk managers in developed and emerging markets can parsimoniously incorporate such information (international dependency) into their risk management models to produce measures of downside risk that have more desirable ex post properties (viz. forecast efficiency properties).
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