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Extreme Value Analysis of Daily Canadian Crude Oil Prices

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Abstract

Crude oil markets are highly volatile and risky. Extreme value theory (EVT), an approach to modelling and measuring risks under rare events, has seen a more prominent role in risk management in recent years. This paper presents an application of EVT to the daily returns of crude oil prices in the Canadian spot market between 1998 and 2006. We focus on the peak over threshold method by analyzing the generalized Pareto-distributed exceedances over some high threshold. This method provides an effective means for estimating tail risk measures such as Value-at-Risk and Expected Shortfall. The estimates of risk measures computed under different high quantile levels exhibit strong stability across a range of the selected thresholds. At the 99th quantile, the estimates of VaR are approximately 6.3% and 6.8% for daily positive and negative returns, respectively.

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Bibliographic Info

Paper provided by Department of Economics, University of Victoria in its series Econometrics Working Papers with number 0708.

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Length: 24 pages
Date of creation: 09 Oct 2007
Date of revision:
Handle: RePEc:vic:vicewp:0708

Note: ISSN 1485-6441
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Keywords: Crude oil; daily returns; market volatility; extreme value analysis;

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  1. Modelling Extremes
    by Dave Giles in Econometrics Beat: Dave Giles' Blog on 2012-04-16 18:29:00
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Cited by:
  1. He, Angela W.W. & Kwok, Jerry T.K. & Wan, Alan T.K., 2010. "An empirical model of daily highs and lows of West Texas Intermediate crude oil prices," Energy Economics, Elsevier, vol. 32(6), pages 1499-1506, November.
  2. Herrera, Rodrigo, 2013. "Energy risk management through self-exciting marked point process," Energy Economics, Elsevier, vol. 38(C), pages 64-76.

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