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Downside Risk for European Equity Markets

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  • Cotter, John

Abstract

This paper applies extreme value theory to measure downside risk for European equity markets. Two related measures, value at risk and the excess loss probability estimator provide a coherent approach to optimally protect investor wealth opportunities for low quantile and probability combinations. The fat-tailed characteristic of equity index returns is captured by explicitly modelling tail returns only. The paper finds the DAX100 is the most volatile index, and this generally becomes more pronounced as one moves to lower quantile and probability estimates.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 3537.

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Date of creation: 2004
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Handle: RePEc:pra:mprapa:3537

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  1. Arzac, Enrique R. & Bawa, Vijay S., 1977. "Portfolio choice and equilibrium in capital markets with safety-first investors," Journal of Financial Economics, Elsevier, Elsevier, vol. 4(3), pages 277-288, May.
  2. Ghose, Devajyoti & Kroner, Kenneth F., 1995. "The relationship between GARCH and symmetric stable processes: Finding the source of fat tails in financial data," Journal of Empirical Finance, Elsevier, Elsevier, vol. 2(3), pages 225-251, September.
  3. Poon, Ser-Huang & Taylor, Stephen J., 1992. "Stock returns and volatility: An empirical study of the UK stock market," Journal of Banking & Finance, Elsevier, Elsevier, vol. 16(1), pages 37-59, February.
  4. 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.
  5. Koedijk, Kees G & Kool, Clemens J M, 1992. "Tail Estimates of East European Exchange Rates," Journal of Business & Economic Statistics, American Statistical Association, American Statistical Association, vol. 10(1), pages 83-96, January.
  6. Philippe Artzner & Freddy Delbaen & Jean-Marc Eber & David Heath, 1999. "Coherent Measures of Risk," Mathematical Finance, Wiley Blackwell, Wiley Blackwell, vol. 9(3), pages 203-228.
  7. Subu Venkataraman, 1997. "Value at risk for a mixture of normal distributions: the use of quasi- Bayesian estimation techniques," Economic Perspectives, Federal Reserve Bank of Chicago, Federal Reserve Bank of Chicago, issue Mar, pages 2-13.
  8. Cotter, John, 2000. "Margin Exceedences for European Stock Index Futures using Extreme Value Theory," MPRA Paper 3534, University Library of Munich, Germany, revised 2001.
  9. Francis X. Diebold & Til Schuermann & John D. Stroughair, 1998. "Pitfalls and Opportunities in the Use of Extreme Value Theory in Risk Management," New York University, Leonard N. Stern School Finance Department Working Paper Seires, New York University, Leonard N. Stern School of Business- 98-081, New York University, Leonard N. Stern School of Business-.
  10. Jón Daníelsson & Casper G. de Vries, 1998. "Beyond the Sample: Extreme Quantile and Probability Estimation," Tinbergen Institute Discussion Papers 98-016/2, Tinbergen Institute.
  11. Phillip Kearns & Adrian Pagan, 1997. "Estimating The Density Tail Index For Financial Time Series," The Review of Economics and Statistics, MIT Press, vol. 79(2), pages 171-175, May.
  12. Liam Gallagher, 1999. "A multi-country analysis of the temporary and permanent components of stock prices," Applied Financial Economics, Taylor & Francis Journals, Taylor & Francis Journals, vol. 9(2), pages 129-142.
  13. Jansen, Dennis W. & Koedijk, Kees G. & de Vries, Casper G., 2000. "Portfolio selection with limited downside risk," Journal of Empirical Finance, Elsevier, Elsevier, vol. 7(3-4), pages 247-269, November.
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Cited by:
  1. Sasa Zikovic & Randall Filer, 2012. "Ranking of VaR and ES Models: Performance in Developed and Emerging Markets," CESifo Working Paper Series 3980, CESifo Group Munich.
  2. Cotter, John, 2006. "Modelling catastrophic risk in international equity markets: An extreme value approach," MPRA Paper 3507, University Library of Munich, Germany.
  3. John Cotter, 2005. "Extreme risk in futures contracts," Applied Economics Letters, Taylor & Francis Journals, Taylor & Francis Journals, vol. 12(8), pages 489-492.
  4. Cotter, John, 2004. "Modelling extreme financial returns of global equity markets," MPRA Paper 3532, University Library of Munich, Germany.
  5. Marco Rocco, 2011. "Extreme value theory for finance: a survey," Questioni di Economia e Finanza (Occasional Papers) 99, Bank of Italy, Economic Research and International Relations Area.
  6. Sasa Zikovic & Randall Filer, 2009. "Hybrid Historical Simulation VaR and ES: Performance in Developed and Emerging Markets," CESifo Working Paper Series 2820, CESifo Group Munich.

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