Measuring Tail Thickness under GARCH and an Application to Extreme Exchange Rate Changes
AbstractAccurate modeling of extreme price changes is vital to financial risk management. We examine the small sample properties of adaptive tail index estimators under the class of student-t marginal distribution functions including GARCH and propose a model-based bias-corrected estimation approach. Our simulation results indicate that bias strongly relates to the underlying model and may be positively as well as negatively signed. The empirical study of daily exchange rate changes reveals substantial differences in measured tail-thickness due to small sample bias. As a consequence, high quantile estimation may lead to a substantial underestimation of tail risk.
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Bibliographic InfoPaper provided by EconWPA in its series Econometrics with number 0401008.
Length: 40 pages
Date of creation: 30 Jan 2004
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Note: Type of Document - pdf; prepared on win00; to print on laserjet; pages: 40
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fat tails; tail index; stationary marginal distribution; GARCH; Hill estimator; foreign exchange;
Find related papers by JEL classification:
- C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
- C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
- F31 - International Economics - - International Finance - - - Foreign Exchange
This paper has been announced in the following NEP Reports:
- NEP-ALL-2004-02-01 (All new papers)
- NEP-ECM-2004-02-01 (Econometrics)
- NEP-ETS-2004-02-01 (Econometric Time Series)
- NEP-FIN-2004-02-01 (Finance)
- NEP-FMK-2004-02-01 (Financial Markets)
- NEP-IFN-2004-02-01 (International Finance)
- NEP-RMG-2004-02-01 (Risk Management)
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