Measuring and testing tail equivalence

Abstract: We call two copulas tail equivalent if their first-order approximations in the tail coincide. As a special case, a copula is called tail symmetric if it is tail equivalent to the associated survival copula. We propose a novel measure and statistical test for tail equivalence. The proposed measure takes the value of zero if and only if the two copulas share a pair of tail order and tail order parameter in common. Moreover, taking the nature of these tail quantities into account, we design the proposed measure so that it takes a large value when tail orders are different, and a small value when tail order parameters are non-identical. We derive asymptotic properties of the proposed measure, and then propose a novel statistical test for tail equivalence. Performance of the proposed test is demonstrated in a series of simulation studies and empirical analyses of financial stock returns in the periods of the world financial crisis and the COVID-19 recession. Our empirical analysis reveals non-identical tail behaviors in different pairs of stocks, different parts of tails, and the two periods of recessions.