Extreme Returns, Tail Estimation, and Value-at-Risk
AbstractAccurate prediction of extreme events are of primary importance in many financial applications. The properties of historical simulation and Risk Metrics techniques for computing Valu-at Risk (VaR) are compared with a method which involves modelling the tails of financial returns explicitly with a tail estimator. The methods are compared using a sample of U.S. stock returns. For predictions of low probability worst outcomes, RiskMetrics type analysis underpredicts while historical simulation overpredicts. However, the estimates obtained from applying the tail estimator are more accurate in the VaR prediction. This implies that capital requirements can be lower by doing VaR with the tail estimator.
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Bibliographic InfoPaper provided by Financial Markets Group in its series FMG Discussion Papers with number dp273.
Date of creation: Jul 1997
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