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Extreme Value Estimation of Boom and Crash Statistics

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  • John Cotter

Abstract

Extreme price movements associated with market crashes and booms have catastrophic repercussions for all investors and it is necessary to make accurate predictions of the frequency and severity of these events. This paper investigates the extreme behaviour of equity market returns and quantifies the possible losses experienced during financial crises. Extreme value theory using the block maxima method is applied to equity indices representing American, Asian and European markets. The empirical evidence shows that the tail indices are characterized by the fat-tailed Frechet distribution. Extreme return levels associated with market crashes are more severe than booms. Asian markets exhibit the largest propensity for experiencing crashes and booms.

Suggested Citation

  • John Cotter, 2006. "Extreme Value Estimation of Boom and Crash Statistics," The European Journal of Finance, Taylor & Francis Journals, vol. 12(6-7), pages 553-566.
  • Handle: RePEc:taf:eurjfi:v:12:y:2006:i:6-7:p:553-566
    DOI: 10.1080/13518470500460111
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    References listed on IDEAS

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    1. John Cotter, 2005. "Tail behaviour of the euro," Applied Economics, Taylor & Francis Journals, vol. 37(7), pages 827-840.
    2. 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.
    3. Arzac, Enrique R. & Bawa, Vijay S., 1977. "Portfolio choice and equilibrium in capital markets with safety-first investors," Journal of Financial Economics, Elsevier, vol. 4(3), pages 277-288, May.
    4. Anders Johansen & Didier Sornette, 2000. "The Nasdaq crash of April 2000: Yet another example of log-periodicity in a speculative bubble ending in a crash," Papers cond-mat/0004263, arXiv.org, revised May 2000.
    5. Broussard, John Paul, 2001. "Extreme-value and margin setting with and without price limits," The Quarterly Review of Economics and Finance, Elsevier, vol. 41(3), pages 365-385.
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    Cited by:

    1. 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.
    2. Echaust Krzysztof, 2014. "A Comparison of Tail Behaviour of Stock Market Returns," Folia Oeconomica Stetinensia, Sciendo, vol. 14(1), pages 1-13, June.

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