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Extreme risk in futures contracts

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  • John Cotter

Abstract

This article uses Extreme Value Theory (EVT) to measure extreme risk in futures contracts with diverging underlying assets. The approach provides a framework for analysing the distributional properties of extreme returns. EVT is statistically robust at estimating Value at Risk (VaR) for different asset classes and at very low probabilities. By way of contrast, the estimation bias by relying on the thin-tailed normal distribution for measuring extreme price movements is illustrated. Back-tests confirm the relative accuracy of the approaches.

Suggested Citation

  • John Cotter, 2005. "Extreme risk in futures contracts," Applied Economics Letters, Taylor & Francis Journals, vol. 12(8), pages 489-492.
  • Handle: RePEc:taf:apeclt:v:12:y:2005:i:8:p:489-492
    DOI: 10.1080/13504850500109816
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    References listed on IDEAS

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    1. John Cotter & Donal G. McKillop, 2000. "The Distributional Characteristics of a Selection of Contracts Traded on the London International Financial Futures Exchange," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 27(3‐4), pages 487-510, April.
    2. Phillip Kearns & Adrian Pagan, 1997. "Estimating The Density Tail Index For Financial Time Series," The Review of Economics and Statistics, MIT Press, vol. 79(2), pages 171-175, May.
    3. John Cotter, 2005. "Tail behaviour of the euro," Applied Economics, Taylor & Francis Journals, vol. 37(7), pages 827-840.
    4. John Cotter, 2004. "Downside risk for European equity markets," Applied Financial Economics, Taylor & Francis Journals, vol. 14(10), pages 707-716.
    5. Ming-Yuan Leon Li & Hsiou-wei William Lin, 2004. "Estimating value-at-risk via Markov switching ARCH models - an empirical study on stock index returns," Applied Economics Letters, Taylor & Francis Journals, vol. 11(11), pages 679-691.
    6. John Cotter & Donal G. McKillop, 2000. "The Distributional Characteristics of a Selection of Contracts Traded on the London International Financial Futures Exchange," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 27(3‐4), pages 487-510, April.
    7. Cotter, John, 2001. "Margin exceedences for European stock index futures using extreme value theory," Journal of Banking & Finance, Elsevier, vol. 25(8), pages 1475-1502, August.
    8. Hans Dewachter & Geert Gielens, 1999. "Setting futures margins: the extremes approach," Applied Financial Economics, Taylor & Francis Journals, vol. 9(2), pages 173-181.
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    Cited by:

    1. John Cotter, 2006. "Modelling catastrophic risk in international equity markets: an extreme value approach," Applied Financial Economics Letters, Taylor and Francis Journals, vol. 2(1), pages 13-17, January.
    2. Roland Füss & Zeno Adams & Dieter G Kaiser, 2010. "The predictive power of value-at-risk models in commodity futures markets," Journal of Asset Management, Palgrave Macmillan, vol. 11(4), pages 261-285, October.
    3. Marco Rocco, 2011. "Extreme value theory for finance: a survey," Questioni di Economia e Finanza (Occasional Papers) 99, Bank of Italy, Economic Research and International Relations Area.

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