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• Michael Rockinger

-with what frequency do we find variations of returns beyond a given threshold ?

-over a given period, what type of extreme variation can be expected?

- with what type of unconditional distribution of returns are the tails of returns compatible?

-in a cross country setting of emerging and mature financial markets do extreme variations behave in a similar manner?

- can we learn about the evolution of returns of presently developing economies from the early returns of presently mature markets?

- do countries behave similarly in terms of up or down crashes for a given level of development?

In the following paper we start with a review of theoretical elements of evt. In the empirical section of this study we consider five mature markets, nine Asian, six Eastern European, and seven Latin American emerging markets. The tail-behavior of returns is found to be compatible with the existence of up to the third moment but not beyond. The estimation of the tail distribution as a Generalized Pareto Distribution shows that great care has to be taken for emerging markets where little data is available and returns' distribution is subjet to violate the iid assumption. Using a subsample of countries we demonstrate the limitations of evt. We also show that little can be learned from 19th century US data about presently emerging markets' tail behavior.

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Paper provided by HEC Paris in its series Les Cahiers de Recherche with number 668.

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Length: 57 pages
Date of creation: 01 Apr 1999
Date of revision:
Handle: RePEc:ebg:heccah:0668

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Keywords: extreme value theory; generalized Pareto distribution; stock market returns;

Find related papers by JEL classification:
C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: General - - - Estimation
C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions
G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
O16 - Economic Development, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment

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1. Niklas Wagner & Terry Marsh, 2000. "Return-Volume Dependence and Extremes in International Equity Markets," Research Program in Finance, Working Paper Series 1002, Research Program in Finance, Institute for Business and Economic Research, UC Berkeley. [Downloadable!]
   Other versions:
   • Terry A. Marsh and Niklas Wagner., 2000. "Return-Volume Dependence and Extremes in International Equity Markets," Research Program in Finance Working Papers RPF-293, University of California at Berkeley. [Downloadable!]
2. Manfred Gilli & Evis këllezi, 2006. "An Application of Extreme Value Theory for Measuring Financial Risk," Computational Economics, Springer, vol. 27(2), pages 207-228, May. [Downloadable!] (restricted)
3. Timotheos Angelidis & Alexandros Benos & Stavros Degiannakis, 2007. "A robust VaR model under different time periods and weighting schemes," Review of Quantitative Finance and Accounting, Springer, vol. 28(2), pages 187-201, February. [Downloadable!] (restricted)
4. Niklas Wagner & Terry Marsh, 2003. "Measuring Tail Thickness under GARCH and an Application to Extremal Exchange Rate Changes," Research Program in Finance, Working Paper Series 1012, Research Program in Finance, Institute for Business and Economic Research, UC Berkeley. [Downloadable!]
5. Niklas Wagner & Terry Marsh, 2000. "On Adaptive Tail Index Estimation for Financial Return Models," Research Program in Finance, Working Paper Series 1000, Research Program in Finance, Institute for Business and Economic Research, UC Berkeley. [Downloadable!]

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