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Spectral measures of risk for international futures markets: A comparison of extreme value and Lévy models

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  • Mozumder, Sharif
  • Choudhry, Taufiq
  • Dempsey, Michael

Abstract

This paper investigates Lévy spectral risk measures (SRM) as a coherent alternative to generalized Pareto spectral risk measures. Specifically, using futures data from major indexes, we consider using SRM for conditional distributions belonging to the generalized hyperbolic family of Lévy processes, and compare and contrast the results with those obtained from the traditional unconditional extreme value approach. Compared with Lévy models, the extreme value model provides poor estimates of quantiles outside the fixed tails, which in turn yield poor estimates of the spectral risk measure itself. The superiority of the Lévy models is increasingly apparent as investors become increasingly risk averse.

Suggested Citation

  • Mozumder, Sharif & Choudhry, Taufiq & Dempsey, Michael, 2018. "Spectral measures of risk for international futures markets: A comparison of extreme value and Lévy models," Global Finance Journal, Elsevier, vol. 37(C), pages 248-261.
  • Handle: RePEc:eee:glofin:v:37:y:2018:i:c:p:248-261
    DOI: 10.1016/j.gfj.2018.07.001
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    References listed on IDEAS

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    1. Kevin Dowd & John Cotter & Ghulam Sorwar, 2008. "Spectral Risk Measures: Properties and Limitations," Journal of Financial Services Research, Springer;Western Finance Association, vol. 34(1), pages 61-75, August.
    2. John Cotter & Kevin Dowd, 2010. "Estimating financial risk measures for futures positions: A nonparametric approach," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 30(7), pages 689-703, July.
    3. Cotter, John & Dowd, Kevin, 2006. "Spectral Risk Measures with an Application to Futures Clearinghouse Variation Margin Requirements," MPRA Paper 3495, University Library of Munich, Germany.
    4. Cotter, John & Dowd, Kevin, 2006. "Extreme spectral risk measures: An application to futures clearinghouse margin requirements," Journal of Banking & Finance, Elsevier, vol. 30(12), pages 3469-3485, December.
    5. Sorwar, Ghulam & Dowd, Kevin, 2010. "Estimating financial risk measures for options," Journal of Banking & Finance, Elsevier, vol. 34(8), pages 1982-1992, August.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Lévy-Khintchine formula; Spectral risk measures; Value-at-risk; Generalized hyperbolic distributions; Bootstrapping;
    All these keywords.

    JEL classification:

    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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