Advanced Search
MyIDEAS: Login

Measuring market risk using extreme value theory

Contents:

Author Info

  • Jose Oliver Q. Suaiso

    (University of the Philippines School of Statistics)

  • Dennis S. Mapa

    (University of the Philippines School of Statistics)

Abstract

The adoption of Basel II standards by the Bangko Sentral ng Pilipinas initiates financial institutions to develop value-at-risk (VaR)models to measure market risk. In this paper, two VaR models are considered using the peaks-over-threshold (POT) approach of the extreme value theory (EVT) : (1) static EVT model, which is the straightforward application of pot to the bond benchmark rates; and (2) dynamic evt model, which applies pot to the residuals of the fitted AR-GARCH model. The results are compared with traditional VaR methods such as RiskMetrics and AR-GARCH-type models. The relative size, accuracy, and efficiency of the models are assessed using mean relative bias, backtesting, likelihood ratio tests, loss function, mean relative scaled bias, and computation of market risk charge. Findings show that the dynamic EVT model can capture market risk conservatively, accurately, and efficiently. It is also practical to use because it has the potential to lower a bank’s capital requirements. Comparing the two EVT models, the dynamic model is better than static as the former can address some issues in risk measurement and effectively capture market risks.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://pre.econ.upd.edu.ph/index.php/pre/article/view/5/670
Download Restriction: no

Bibliographic Info

Article provided by University of the Philippines School of Economics and Philippine Economic Society in its journal Philippine Review of Economics.

Volume (Year): 46 (2009)
Issue (Month): 2 (December)
Pages: 91-121

as in new window
Handle: RePEc:phs:prejrn:v:46:y:2009:i:2:p:91-121

Contact details of provider:
Postal: Diliman, Quezon City 1101
Phone: 927-9686
Web page: http://www.econ.upd.edu.ph/
More information through EDIRC

Related research

Keywords: extreme value theory; peaks-over-threshold; value-at-risk; market risk; risk management;

Other versions of this item:

Find related papers by JEL classification:

References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
as in new window
  1. Tim Bollerslev, 1986. "Generalized autoregressive conditional heteroskedasticity," EERI Research Paper Series EERI RP 1986/01, Economics and Econometrics Research Institute (EERI), Brussels.
  2. Jose Lopez, 1998. "Methods for evaluating value-at-risk estimates," Research Paper 9802, Federal Reserve Bank of New York.
  3. Peter Christoffersen, 2004. "Backtesting Value-at-Risk: A Duration-Based Approach," Journal of Financial Econometrics, Society for Financial Econometrics, vol. 2(1), pages 84-108.
  4. Christoffersen, Peter F, 1998. "Evaluating Interval Forecasts," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(4), pages 841-62, November.
  5. Darryll Hendricks, 1996. "Evaluation of value-at-risk models using historical data," Economic Policy Review, Federal Reserve Bank of New York, issue Apr, pages 39-69.
  6. Jón Daníelsson & Casper G. de Vries, 1998. "Value-at-Risk and Extreme Returns," Tinbergen Institute Discussion Papers 98-017/2, Tinbergen Institute.
  7. Gencay, Ramazan & Selcuk, Faruk & Ulugulyagci, Abdurrahman, 2003. "High volatility, thick tails and extreme value theory in value-at-risk estimation," Insurance: Mathematics and Economics, Elsevier, vol. 33(2), pages 337-356, October.
  8. 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.
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
  1. Peter Julian A. Cayton & Dennis S. Mapa, Ph. D. & Mary Therese A. Lising, 2010. "Estimating Value-At-Risk (Var) Using TIVEX-POT Models," Journal of Advanced Studies in Finance, ASERS Publishing, vol. 0(2), pages 152 - 170, December.
  2. Cayton, Peter Julian A. & Mapa, Dennis S., 2012. "Time-varying conditional Johnson SU density in value-at-risk (VaR) methodology," MPRA Paper 36206, University Library of Munich, Germany.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:phs:prejrn:v:46:y:2009:i:2:p:91-121. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Reuben T. Campos).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.