Applications of extreme value theory to collateral valuation
AbstractIn this paper we examine how the use of extreme value theory yields collateral requirements that are robust to extreme fluctuations in the market price of the asset used as collateral. These requirements are robust in the sense that they are able to adjust to reflect the tail behavior of the return distribution of the asset pledged as collateral. In particular, we study the risk and cost attributes of market risk measures by constructing a risk-cost frontier for the collateral pledged to cover exposures in a securities settlement system. The frontier can be used as a diagnostic tool to understand the risk-cost trade-off of different methodologies to calculate collateral value (haircuts) and select the most efficient alternative in a variety of settings
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Bibliographic InfoArticle provided by Capco Institute in its journal Journal of Financial Transformation.
Volume (Year): 20 (2007)
Issue (Month): ()
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Collateral under extreme events; High frequency finance; Financial risk management; Extreme value theory; Risk measures;
Find related papers by JEL classification:
- C10 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - General
- C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
- C16 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Econometric and Statistical Methods; Specific Distributions
- C46 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Specific Distributions
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