Structural change in tail behaviour and the recent financial crises

Abstract

This paper is a contribution in exploring the empirical evidence of the instability in the tail behaviour returns of stock market indices, based on some developments in the analysis of structural change models. The proposed approach can jointly determine the number of structural breaks in a series of tail–indexes and estimate the mean tail–index levels in different regimes. Here we advocate a modified Hill estimator for the tail index. We provide simulations that indicate good finite sample properties of our procedure. The proposed method is then applied to the tail behaviour returns of two international stock market indices, SP500 (USA) and CAC40 (France). The results indicate that procedures perform reasonably well and lead to an appropriate number of breaks with locations coinciding with major financial crisis and events such as the LTCM crisis, September 11, 2001 terrorist attack, sub–prime crisis in 2008 and European Union (EU) debt crisis triggered on 2010.