Risk premium: insights over the threshold
The aim of this article is 2-fold: first to test the adequacy of Pareto distributions to describe the tail of financial returns in emerging and developed markets, and second to study the possible correlation between stock market indices observed returns and return's extreme distributional characteristics measured by Value at Risk and Expected Shortfall. We test the empirical model using daily data from 41 countries, in the period from 1995 to 2005. The findings support the adequacy of Pareto distributions and the use of a log linear regression estimation of their parameters, as an alternative for the usually employed Hill's estimator. We also report a significant relationship between extreme distributional characteristics and observed returns, especially for developed countries.
Volume (Year): 18 (2007)
Issue (Month): 1 ()
|Contact details of provider:|| Web page: http://www.tandfonline.com/RAFE20|
|Order Information:||Web: http://www.tandfonline.com/pricing/journal/RAFE20|
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.:
- Bawa, Vijay S. & Lindenberg, Eric B., 1977. "Capital market equilibrium in a mean-lower partial moment framework," Journal of Financial Economics, Elsevier, vol. 5(2), pages 189-200, November.
- Robert Faff, 2004. "A simple test of the Fama and French model using daily data: Australian evidence," Applied Financial Economics, Taylor & Francis Journals, vol. 14(2), pages 83-92.
- Samer Al-Rjoub & Oscar Varela & M. Kabir Hassan, 2005. "The size effect reversal in the USA," Applied Financial Economics, Taylor & Francis Journals, vol. 15(17), pages 1189-1197.
- Francis X. Diebold & Til Schuermann & John D. Stroughair, 1998.
"Pitfalls and Opportunities in the Use of Extreme Value Theory in Risk Management,"
Center for Financial Institutions Working Papers
98-10, Wharton School Center for Financial Institutions, University of Pennsylvania.
- Francis X. Diebold & Til Schuermann & John D. Stroughair, 1998. "Pitfalls and Opportunities in the Use of Extreme Value Theory in Risk Management," New York University, Leonard N. Stern School Finance Department Working Paper Seires 98-081, New York University, Leonard N. Stern School of Business-.
- Fama, Eugene F & French, Kenneth R, 1995. " Size and Book-to-Market Factors in Earnings and Returns," Journal of Finance, American Finance Association, vol. 50(1), pages 131-55, March.
- Kenneth R. French & James M. Poterba, 1991.
"Investor Diversification and International Equity Markets,"
NBER Working Papers
3609, National Bureau of Economic Research, Inc.
- French, Kenneth R & Poterba, James M, 1991. "Investor Diversification and International Equity Markets," American Economic Review, American Economic Association, vol. 81(2), pages 222-26, May.
- Nantell, Timothy J. & Price, Barbara, 1979. "An Analytical Comparison of Variance and Semivariance Capital Market Theories," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 14(02), pages 221-242, June.
- Barberis, Nicholas & Thaler, Richard, 2003.
"A survey of behavioral finance,"
Handbook of the Economics of Finance,
in: G.M. Constantinides & M. Harris & R. M. Stulz (ed.), Handbook of the Economics of Finance, edition 1, volume 1, chapter 18, pages 1053-1128
- Yamai, Yasuhiro & Yoshiba, Toshinao, 2005. "Value-at-risk versus expected shortfall: A practical perspective," Journal of Banking & Finance, Elsevier, vol. 29(4), pages 997-1015, April.
- Harlow, W. V. & Rao, Ramesh K. S., 1989. "Asset Pricing in a Generalized Mean-Lower Partial Moment Framework: Theory and Evidence," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 24(03), pages 285-311, September.
- Y. Malevergne & V. Pisarenko & D. Sornette, 2006. "On the power of generalized extreme value (GEV) and generalized Pareto distribution (GPD) estimators for empirical distributions of stock returns," Applied Financial Economics, Taylor & Francis Journals, vol. 16(3), pages 271-289.
- Hogan, William W. & Warren, James M., 1974. "Toward the Development of an Equilibrium Capital-Market Model Based on Semivariance," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 9(01), pages 1-11, January.
- Robert Brooks & Robert Faff & Tim Fry & E. Bissoondoyal-Bheenick, 2005. "Alternative beta risk estimators in cases of extreme thin trading: Canadian evidence," Applied Financial Economics, Taylor & Francis Journals, vol. 15(18), pages 1251-1258.
- Miguel T. Delfiner & Matías A. Gutiérrez Girault, 2002. "Aplicación de la teoría de valores extremos al gerenciamiento del riesgo," CEMA Working Papers: Serie Documentos de Trabajo. 217, Universidad del CEMA.
- Young-Hye Cho & Robert F. Engle, 1999. "Time-Varying Betas and Asymmetric Effect of News: Empirical Analysis of Blue Chip Stocks," NBER Working Papers 7330, National Bureau of Economic Research, Inc.
- Andersen, Torben G. & Bollerslev, Tim & Diebold, Francis X. & Wu, Jin, 2004.
"Realized beta: Persistence and predictability,"
CFS Working Paper Series
2004/16, Center for Financial Studies (CFS).
- Harvey, Campbell R, 1995. "The Risk Exposure of Emerging Equity Markets," World Bank Economic Review, World Bank Group, vol. 9(1), pages 19-50, January.
- McNeil, Alexander J., 1997. "Estimating the Tails of Loss Severity Distributions Using Extreme Value Theory," ASTIN Bulletin: The Journal of the International Actuarial Association, Cambridge University Press, vol. 27(01), pages 117-137, May.
- Ritirupa Samanta & Blake LeBaron, 2005. "Extreme Value Theory and Fat Tails in Equity Markets," Computing in Economics and Finance 2005 140, Society for Computational Economics.
- Campbell R. Harvey & Akhtar Siddique, 2000. "Conditional Skewness in Asset Pricing Tests," Journal of Finance, American Finance Association, vol. 55(3), pages 1263-1295, 06.
- Hogan, William W. & Warren, James M., 1972. "Computation of the Efficient Boundary in the E-S Portfolio Selection Model," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 7(04), pages 1881-1896, September.
- Estrada, Javier, 2002. "Systematic risk in emerging markets: the," Emerging Markets Review, Elsevier, vol. 3(4), pages 365-379, December.
- Richard Harris & C. Coskun Kucukozmen & Fatih Yilmaz, 2004. "Skewness in the conditional distribution of daily equity returns," Applied Financial Economics, Taylor & Francis Journals, vol. 14(3), pages 195-202.
When requesting a correction, please mention this item's handle: RePEc:taf:apfiec:v:18:y:2007:i:1:p:41-59. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Michael McNulty)
If references are entirely missing, you can add them using this form.