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Managing extreme risks in tranquil and volatile markets using conditional extreme value theory

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  • Bystrom, Hans N. E.

Abstract

Financial risk management typically deals with low probability events in the tails of asset price distributions. In order to capture the behavior of these tails, one should therefore rely on models that explicitly focus on the tails. Extreme value theory (EVT) based models do exactly that, and in this paper we apply both unconditional and conditional EVT models to the management of extreme market risks in stock markets. We find conditional EVT models to give particularly accurate Value-at-Risk measures, and a comparison with traditional (GARCH) approaches to calculate Value-at-Risk demonstrates EVT as being the superior approach both for standard and more extreme Value-at-Risk quantiles.

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Bibliographic Info

Article provided by Elsevier in its journal International Review of Financial Analysis.

Volume (Year): 13 (2004)
Issue (Month): 2 ()
Pages: 133-152

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Handle: RePEc:eee:finana:v:13:y:2004:i:2:p:133-152

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Web page: http://www.elsevier.com/locate/inca/620166

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References

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  1. Evis Këllezi & Manfred Gilli, 2000. "Extreme Value Theory for Tail-Related Risk Measures," FAME Research Paper Series rp18, International Center for Financial Asset Management and Engineering.
  2. Francis X. Diebold & Til Schuermann & John D. Stroughair, 1998. "Pitfalls and Opportunities in the Use of Extreme Value Theory in Risk Management," Center for Financial Institutions Working Papers 98-10, Wharton School Center for Financial Institutions, University of Pennsylvania.
  3. Poon, Ser-Huang & Taylor, Stephen J., 1992. "Stock returns and volatility: An empirical study of the UK stock market," Journal of Banking & Finance, Elsevier, vol. 16(1), pages 37-59, February.
  4. Engle, Robert F, 1982. "Autoregressive Conditional Heteroscedasticity with Estimates of the Variance of United Kingdom Inflation," Econometrica, Econometric Society, vol. 50(4), pages 987-1007, July.
  5. Baillie, R.T. & Degennaro, R.P., 1988. "Stock Returns And Volatility," Papers 8803, Michigan State - Econometrics and Economic Theory.
  6. Bollerslev, Tim, 1986. "Generalized autoregressive conditional heteroskedasticity," Journal of Econometrics, Elsevier, vol. 31(3), pages 307-327, April.
  7. McNeil, Alexander J. & Frey, Rudiger, 2000. "Estimation of tail-related risk measures for heteroscedastic financial time series: an extreme value approach," Journal of Empirical Finance, Elsevier, vol. 7(3-4), pages 271-300, November.
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Cited by:
  1. Bertrand B. Maillet & Jean-Philippe R. Médecin, 2010. "Extreme Volatilities, Financial Crises and L-moment Estimations of Tail-indexes," Working Papers 2010_10, Department of Economics, University of Venice "Ca' Foscari".
  2. Fong Chan, Kam & Gray, Philip, 2006. "Using extreme value theory to measure value-at-risk for daily electricity spot prices," International Journal of Forecasting, Elsevier, vol. 22(2), pages 283-300.
  3. Stavros Degiannakis & Christos Floros & Alexandra Livada, 2012. "Evaluating value-at-risk models before and after the financial crisis of 2008: International evidence," Managerial Finance, Emerald Group Publishing, vol. 38(3), pages 436-452, March.
  4. Jimenez-Martin, Juan-Angel & McAleer, Michael & Pérez-Amaral, Teodosio & Santos, Paulo Araújo, 2013. "GFC-robust risk management under the Basel Accord using extreme value methodologies," Mathematics and Computers in Simulation (MATCOM), Elsevier, vol. 94(C), pages 223-237.
  5. Louzis, Dimitrios P. & Xanthopoulos-Sisinis, Spyros & Refenes, Apostolos P., 2011. "Are realized volatility models good candidates for alternative Value at Risk prediction strategies?," MPRA Paper 30364, University Library of Munich, Germany.
  6. Marco Rocco, 2011. "Extreme value theory for finance: a survey," Questioni di Economia e Finanza (Occasional Papers) 99, Bank of Italy, Economic Research and International Relations Area.
  7. Brännäs, Kurt & Quoreshi, Shahiduzzaman & Simonsen, Ola, 2002. "Extreme-Value Characteristics in Daily Time Series of Swedish Stock Returns," UmeÃ¥ Economic Studies 597, Umeå University, Department of Economics.
  8. Marimoutou, Velayoudoum & Raggad, Bechir & Trabelsi, Abdelwahed, 2009. "Extreme Value Theory and Value at Risk: Application to oil market," Energy Economics, Elsevier, vol. 31(4), pages 519-530, July.

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