Extremal Dependence between Market and Liquidity Risk : An Analysis for the Swiss Market

We study the extremal dependence of market and liquidity risk, the former being measured through the market value and the latter being measured through the relative bid-ask spread. We apply a non-parametrical approach to measure bivariate exceedance probabilities and the respective dependence function. Our analysis for the Swiss Market indicates moderate tail dependence in that roughly 10% of the exceedances of the 99% quantile are co-exceedances. As our hypothesis tests for independence are rejected for confidence levels of 5% and 1% in almost all cases, we conclude that extreme dependence between negative market returns and liquidity is existing in the empirical data and may be relevant for firm-wide risk management