Estimating the probability of large negative stock market
AbstractCorrect assessment of the risks associated with likely economic outcomes is vital for effective decision making. The objective of investment in the stock market is to obtain positive market returns. The risk, however, is the danger of suffering large negative market returns. A variety of parametric models can be used in assessing this type of risk. A major disadvantage of these techniques is that they require a specific assumption to be made about the nature of the statistical distribution. Projections based on this method are conditional on the validity of this underlying assumption, which itself is not testable. An alternative approach is to use a non-parametric methodology, based on the statistical extreme value theory, which provides a means for evaluating the unconditional distribution (or at least the tails of this distribution) beyond the historically observed values. The methodology involves the calculation of the tail index, which is used to estimate the relevant exceedence probabilities (for different critical levels of loss) for a selection of food industry companies. Information about these downside risks is critically important for investment decision making. In addition, the tail index estimates permit examination of the stable Paretian hypothesis.
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Date of creation: 07 Sep 2004
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Find related papers by JEL classification:
- C10 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - General
- G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
- G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
- Q19 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - Other
This paper has been announced in the following NEP Reports:
- NEP-CFN-2004-09-12 (Corporate Finance)
- NEP-FIN-2004-09-12 (Finance)
- NEP-FMK-2004-09-12 (Financial Markets)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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