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Risk Premium: Insights Over The Threshold

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  • José L. B. Fernandes
  • Augusto Hasman
  • Juan Ignacio Peña

Abstract

The aim of this paper is twofold: First to test the adequacy of Pareto distributions to describe the tail of financial returns in emerging and developed markets, and second to study the possible correlation between stock market indices observed returns and return’s extreme distributional characteristics measured by Value at Risk and Expected Shortfall. We test the empirical model using daily data from 41 countries, in the period from 1995 to 2005. The findings support the adequacy of Pareto distributions and the use of a log linear regression estimation of their parameters, as an alternative for the usually employed Hill’s estimator. We also report a significant relationship between extreme distributional characteristics and observed returns, especially for developed countries.

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File URL: http://www.bcb.gov.br/pec/wps/ingl/wps126.pdf
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Bibliographic Info

Paper provided by Central Bank of Brazil, Research Department in its series Working Papers Series with number 126.

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Date of creation: Dec 2006
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Handle: RePEc:bcb:wpaper:126

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Cited by:
  1. Ricardo Schechtman, 2007. "Joint Validation of Credit Rating PDs under Default Correlation," Working Papers Series 149, Central Bank of Brazil, Research Department.
  2. Alejandro Bernales & Diether W. Beuermann & Gonzalo Cortazar, 2014. "Thinly traded securities and risk management," Estudios de Economia, University of Chile, Department of Economics, vol. 41(1 Year 20), pages 5-48, June.
  3. Gilneu F. A. Vivan & Benjamin M. Tabak, 2007. "A New Proposal for Collection and Generation of Information on Financial Institutions' Risk: the case of derivatives," Working Papers Series 133, Central Bank of Brazil, Research Department.
  4. Solange Gouvea, 2007. "Price Rigidity in Brazil: Evidence from CPI Micro Data," Working Papers Series 143, Central Bank of Brazil, Research Department.

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