Structural change tests in tail behaviour and the Asian crisis

This paper explores tests of the hypothesis that the tail thickness of a di stribution is constant over time. Using Hill's conditional maximum likeliho od estimator for the tail index of a distribution, tests of tail shape cons tancy are constructed that allow for an unknown breakpoint. The recursive t est is shown to be inconsistent in one direction, and only a one-sided test is recommended. Specifically, the test can be used when the alternative hy pothesis is that the tail index decreases over time. A rolling and sequenti al version of the test is consistent in both directions. The methods are il lustrated on recent stock price data for Thailand, Malaysia and Indonesia. The period covers the recent Asian financial crisis and enables us to asses s whether breakpoints in domestic asset return distributions are related to known changes in institutional arrangements in the foreign currency market s of these countries.