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Assessing the importance of the choice threshold in quantifying market risk under the POT method (EVT)

Author

Listed:
  • Sonia Benito Muela

    (Department of Economic Analysis Faculty of Economics and Business Administration National Distance Education University (UNED). Author-Name: Carmen López-Martín
    Department of Business and Accounting Faculty of Economics and Business Administration National Distance Education University (UNED).)

  • Mª Ángeles Navarro

    (PhD. Student of the Faculty of Economics and Business Administration National Distance Education University (UNED).)

Abstract

The conditional extreme value theory has been proven to be one of the most successful in estimating market risk. The implementation of this method in the framework of the Peaks Over Threshold (POT) model requires one to choose a threshold for fitting the generalized Pareto distribution (GPD). In this paper, we investigate whether the selection of the threshold is important for the quantification of market risk. For measuring risk, we use the value at risk (VaR) measure and the expected shortfall (ES) measure. The study has been done for a large set of assets. The results obtained indicate that the quantification of the market risk through the VaR and ES measures does not depend on the threshold selected. This result is also found in a smaller sample.

Suggested Citation

  • Sonia Benito Muela & Mª Ángeles Navarro, 2018. "Assessing the importance of the choice threshold in quantifying market risk under the POT method (EVT)," Documentos de Trabajo del ICAE 2018-20, Universidad Complutense de Madrid, Facultad de Ciencias Económicas y Empresariales, Instituto Complutense de Análisis Económico.
    • Handle: RePEc:ucm:doicae:1820
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    References listed on IDEAS

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    More about this item

    Keywords

    Extreme Value Theory; Peaks over Threshold; Value at Risk; Expected Shortfall; Generalized Pareto Distribution.;
    All these keywords.

    JEL classification:

    • G19 - Financial Economics - - General Financial Markets - - - Other
    • G29 - Financial Economics - - Financial Institutions and Services - - - Other

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