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Abnormal Returns, Risk, and Options in Large Data Sets

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Author Info
Silvia Caserta () (Erasmus University Rotterdam)
Jon Danielsson (London School of Economics and University of Iceland)
Casper G. de Vries () (Erasmus University Rotterdam)

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Abstract

Large data sets in finance with millions of observations have become widely available. Such data sets enable the construction of reliable semi-parametric estimates of the risk associated with extreme price movements. Our approach is based on semi-parametric statistical extreme value analysis, and compares favourably with the conventional finance normal distribution based approach. It is shown that the efficiency of the estimator of the extreme returns may benefit from high frequency data. Empirical tail shapes are calculated for the German Mark-US Dollar foreign exchange rate, and we use the semi- parametric tail estimates in combination with the empirical distribution function to evaluate the returns on exotic options.

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Publisher Info
Paper provided by Tinbergen Institute in its series Tinbergen Institute Discussion Papers with number 98-107/2.

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Date of creation: 09 Oct 1998
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Handle: RePEc:dgr:uvatin:19980107

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Web page: http://www.tinbergen.nl/

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Related research
Keywords: Extreme value theory tail estimation high frequency data exotic options

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References listed on IDEAS
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  1. Boyle, Phelim P., 1977. "Options: A Monte Carlo approach," Journal of Financial Economics, Elsevier, vol. 4(3), pages 323-338, May. [Downloadable!] (restricted)
  2. Jón Daníelsson & Casper G. de Vries, 1998. "Beyond the Sample: Extreme Quantile and Probability Estimation," Tinbergen Institute Discussion Papers 98-016/2, Tinbergen Institute. [Downloadable!]
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  3. Jón Daníelsson & Casper G. de Vries, 1998. "Value-at-Risk and Extreme Returns," Tinbergen Institute Discussion Papers 98-017/2, Tinbergen Institute. [Downloadable!]
  4. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-54, May-June. [Downloadable!] (restricted)
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(explanations, 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.)

  1. Byström, Hans, 2003. "Estimating Default Probabilities Using Stock Prices: The Swedish Banking Sector During the 1990s Banking Crisis," Working Papers 2003:1, Lund University, Department of Economics.
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