Advanced Search
MyIDEAS: Login to save this paper or follow this series

Extreme Value Theory and Fat Tails in Equity Markets

Contents:

Author Info

  • Ritirupa Samanta
  • Blake LeBaron

Abstract

Equity market crashes or booms are extreme realizations of the underlying return distribution. This paper questions whether booms are more or less likely than crashes and whether emerging markets crash more frequently than developed equity markets. We apply Extreme Value Theory (EVT) to construct statistical tests of both of these questions. EVT elegantly frames the problem of extreme events in the context of the limiting distributions of sample maxima and minima. This paper applies generalized extreme value theory to understand the probability of extreme events and estimate the level of �fatness� in the tails of emerging and developed markets. We disentangle the major �tail index� estimators in the literature and evaluate their small sample properties and sensitivities to the number of extreme observations. We choose to use the Hill index to measure the shape of the distribution in the tail. We then apply nonparametric techniques to assess the significance of differences in tail thickness between the positive and negative tails of a given market and in the tail behavior of the developed and emerging region. We construct Monte Carlo and Wild Bootstrap tests of the null of tail symmetry and find that negative tails are statistically significantly fatter than positive tails for a subset of markets in both regions. We frame group bootstrap tests of universal tail behavior for each region and show that the tail index is statistically similar across countries within the same region. This allows us to pool returns and estimate region wide tail behavior. We form bootstrapping tests of pooled returns and document evidence that emerging markets have fatter negative tails than the developed region. Our findings are consistent with prevalent notions of crashes being more in the emerging region than among developed markets. However our results of asymmetry in several markets in both regions, suggest that the risk of market crashes varies significantly within the region. This has important implications for any international portfolio allocation decisions made with a regional view

Download Info

If 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.
File URL: http://people.brandeis.edu/~blebaron/wps/tails.pdf
File Function: main text
Download Restriction: no

Bibliographic Info

Paper provided by Society for Computational Economics in its series Computing in Economics and Finance 2005 with number 140.

as in new window
Length:
Date of creation: 11 Nov 2005
Date of revision:
Handle: RePEc:sce:scecf5:140

Contact details of provider:
Email:
Web page: http://comp-econ.org/
More information through EDIRC

Related research

Keywords: Extreme value theory; fat tails; emerging markets;

Find related papers by JEL classification:

This paper has been announced in the following NEP Reports:

References

No references listed on IDEAS
You can help add them by filling out this form.

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
  1. Jose Fernandes & Augusto Hasman & Juan Ignacio Pena, 2007. "Risk premium: insights over the threshold," Applied Financial Economics, Taylor & Francis Journals, vol. 18(1), pages 41-59.
  2. Stephen G. Cecchetti, 2006. "Measuring the Macroeconomic Risks Posed by Asset Price Booms," NBER Working Papers 12542, National Bureau of Economic Research, Inc.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:sce:scecf5:140. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Christopher F. Baum).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.