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Risk Premium: Insights Over The Threshold

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Author Info
Jose 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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Paper provided by Universidad Carlos III, Departamento de Economía de la Empresa in its series Business Economics Working Papers with number wb062808.

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Date of creation: May 2006
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Handle: RePEc:cte:wbrepe:wb062808

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  11. Vries, Caspar de & Danielsson, Jon, 1996. "Tail Index and Quantile Estimation with Very High Frequency Data," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich.
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