Extreme Value Theory and Value at Risk : Application to Oil Market
AbstractRecent increases in energy prices, especially oil prices, have become a principal concern for consumers, corporations, and governments. Most analysts believe that oil price fluctuations have considerable consequences on economic activity. Oil markets have become relatively free, resulting in a high degree of oil-price volatility and generating radical changes to world energy and oil industries. As a result oil markets are naturally vulnerable to significant negative volatility. An example of such a case is the oil embargo crisis of 1973. In this newly created climate, protection against market risk has become a necessity. Value at Risk (VaR) measures risk exposure at a given probability level and is very important for risk management. Appealing aspects of Extreme Value Theory (EVT) have made convincing arguments for its use in managing energy price risks. In this paper, we apply both unconditional and conditional EVT models to forecast Value at Risk. These models are compared to the performances of other well-known modelling techniques, such as GARCH, historical simulation and Filtered Historical Simulation. Both conditional EVT and Filtered Historical Simulation procedures offer a major improvement over the parametric methods. Furthermore, GARCH(1, 1)-t model may provide equally good results, as well as the combining of the two procedures.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by HAL in its series Working Papers with number halshs-00410746.
Date of creation: 2006
Date of revision:
Note: View the original document on HAL open archive server: http://halshs.archives-ouvertes.fr/halshs-00410746/en/
Contact details of provider:
Web page: http://hal.archives-ouvertes.fr/
Extreme Value Theory; Value at Risk; oil price volatility; GARCH; Historical Simulation; Filtered Historical Simulation.;
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.:
- Darryll Hendricks, 1996. "Evaluation of value-at-risk models using historical data," Economic Policy Review, Federal Reserve Bank of New York, issue Apr, pages 39-69.
- Darryll Hendricks, 1996. "Evaluation of value-at-risk models using historical data," Proceedings, Federal Reserve Bank of Chicago, issue May, pages 334-362.
- Gencay, Ramazan & Selcuk, Faruk & Ulugulyagci, Abdurrahman, 2003. "High volatility, thick tails and extreme value theory in value-at-risk estimation," Insurance: Mathematics and Economics, Elsevier, vol. 33(2), pages 337-356, October.
- Sean D. Campbell, 2005. "A review of backtesting and backtesting procedures," Finance and Economics Discussion Series 2005-21, Board of Governors of the Federal Reserve System (U.S.).
- Christoffersen, Peter F, 1998. "Evaluating Interval Forecasts," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(4), pages 841-62, November.
- Niklas Wagner & Terry A. Marsh, 2004. "Measuring Tail Thickness under GARCH and an Application to Extreme Exchange Rate Changes," Econometrics 0401008, EconWPA.
- Gencay, Ramazan & Selcuk, Faruk, 2004. "Extreme value theory and Value-at-Risk: Relative performance in emerging markets," International Journal of Forecasting, Elsevier, vol. 20(2), pages 287-303.
- Sadorsky, Perry, 1999. "Oil price shocks and stock market activity," Energy Economics, Elsevier, vol. 21(5), pages 449-469, October.
- Michel M. Dacorogna, & Ulrich A. Muller & Olivier V. Pictet & Casper De Vries,, . "The Distribution of Extremal Foreign Exchange Rate Returns in Extremely Large Data Sets," Working Papers 1992-10-22, Olsen and Associates.
- Philippe Artzner & Freddy Delbaen & Jean-Marc Eber & David Heath, 1999. "Coherent Measures of Risk," Mathematical Finance, Wiley Blackwell, vol. 9(3), pages 203-228.
- Bollerslev, Tim, 1986. "Generalized autoregressive conditional heteroskedasticity," Journal of Econometrics, Elsevier, vol. 31(3), pages 307-327, April.
- Longin, Francois M., 2000. "From value at risk to stress testing: The extreme value approach," Journal of Banking & Finance, Elsevier, vol. 24(7), pages 1097-1130, July.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (CCSD).
If references are entirely missing, you can add them using this form.