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GARCH dependence in extreme value models with Bayesian inference

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  • Zhao, Xin
  • Scarrott, Carl John
  • Oxley, Les
  • Reale, Marco

Abstract

Extreme value methods are widely used in financial applications such as risk analysis, forecasting and pricing models. One of the challenges with their application in finance is accounting for the temporal dependence between the observations, for example the stylised fact that financial time series exhibit volatility clustering. Various approaches have been proposed to capture the dependence. Commonly a two-stage approach is taken, where the volatility dependence is removed using a volatility model like a GARCH (or one of its many incarnations) followed by application of standard extreme value models to the assumed independent residual innovations.

Suggested Citation

  • Zhao, Xin & Scarrott, Carl John & Oxley, Les & Reale, Marco, 2011. "GARCH dependence in extreme value models with Bayesian inference," Mathematics and Computers in Simulation (MATCOM), Elsevier, vol. 81(7), pages 1430-1440.
    • Handle: RePEc:eee:matcom:v:81:y:2011:i:7:p:1430-1440
    DOI: 10.1016/j.matcom.2010.08.002
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    References listed on IDEAS

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    Cited by:

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    3. Akhtaruzzaman, Md & Banerjee, Ameet Kumar & Boubaker, Sabri & Moussa, Faten, 2023. "Does green improve portfolio optimisation?," Energy Economics, Elsevier, vol. 124(C).
    4. Jouchi Nakajima & Tsuyoshi Kunihama & Yasuhiro Omori, 2017. "Bayesian modeling of dynamic extreme values: extension of generalized extreme value distributions with latent stochastic processes," Journal of Applied Statistics, Taylor & Francis Journals, vol. 44(7), pages 1248-1268, May.
    5. Huang, Chun-Kai & North, Delia & Zewotir, Temesgen, 2017. "Exchangeability, extreme returns and Value-at-Risk forecasts," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 477(C), pages 204-216.
    6. Fernando Nascimento & Dani Gamerman & Hedibert Lopes, 2016. "Time-varying extreme pattern with dynamic models," TEST: An Official Journal of the Spanish Society of Statistics and Operations Research, Springer;Sociedad de Estadística e Investigación Operativa, vol. 25(1), pages 131-149, March.

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