Long-range Tail Dependence: Edm vs. Extremogram

The dependence of large values in a stochastic process is an important topic in risk, insurance and finance. The idea of risk contagion is based on the idea of large value dependence. The Gaussian copula notoriously fails to capture this phenomenon. Two notions in a process context which attempt to summarize this extremal dependence in a function comparable to a sample correlation function are the extremal dependence measure (EDM) and the extremogram. We review these ideas and compare the two tools and end with a central limit theorem for a natural estimator of the EDM which allows drawing confidence bands comparable to those provided by Bartlett’s formula in a classical context of sample correlation functions.