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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)

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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Bibliographic 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

Related research

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

References

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  1. 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.
  2. Jon Danielsson & Casper G. de Vries, 1998. "Beyond the Sample: Extreme Quantile and Probability Estimation," FMG Discussion Papers dp298, Financial Markets Group.
  3. Jon DANIELSSON & Casper G. DE VRIES, 2000. "Value-at-Risk and Extreme Returns," Annales d'Economie et de Statistique, ENSAE, issue 60, pages 239-270.
  4. Boyle, Phelim P., 1977. "Options: A Monte Carlo approach," Journal of Financial Economics, Elsevier, vol. 4(3), pages 323-338, May.
  5. de Haan, Laurens & Resnick, Sidney I. & Rootzén, Holger & de Vries, Casper G., 1989. "Extremal behaviour of solutions to a stochastic difference equation with applications to arch processes," Stochastic Processes and their Applications, Elsevier, vol. 32(2), pages 213-224, August.
  6. Engle, Robert F, 1982. "Autoregressive Conditional Heteroscedasticity with Estimates of the Variance of United Kingdom Inflation," Econometrica, Econometric Society, vol. 50(4), pages 987-1007, July.
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Cited by:
  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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