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

We study the extremal dependence of market and liquidity risk, the former beingmeasured through the market return and the latter being measured throughthe relative bid-ask spread. We apply a non-parametrical approach to measurebivariate exceedance probabilities and the respective dependence function.Our analysis for the Swiss Market indicates moderate tail dependence in thatroughly 10% of the exceedances of the 99% quantile are co-exceedances. As ourhypothesis tests for independence are rejected for confidence levels of 5% and1% in almost all cases, we conclude that extreme dependence between negativemarket returns and liquidity is existing in the empirical...